Can I start my business with a loan? A lot of retired people ask me this question regularly. My answer: It is not an excellent choice to start a business with a loan. When you retire, you most likely will have at least one house or land. This makes you an attractive customer for a bank loan.
However, if you take a loan to start your business, you will be under stress for many reasons. On the other hand, if you are expanding your business, then a loan is a good idea.
I have seen some retirees start their businesses with a bank loan. They use houses or lands that they bought while they were in service as collateral security. Unfortunately, the companies did not perform well. The result was that they could not pay back the loans. They also lost the land or houses used as collateral security for the loan.
In this article, I will discuss 3 (three) reasons why you should avoid starting your retirement business with a loan.
Table of Contents.
- The interest rate is an extra cost to your business.
- You will put at risk the property or land you bought while in service.
- There is the tendency that you will borrow more than you need.
1. The interest rate is an extra cost to your business.
When you start your business, you will find yourself with many expenses you did not expect. Unfortunately, you do not need to add loan repayment to the list. However, you might be lucky to get a loan from a financial institution that offers a moratorium. A moratorium is a period when you don’t have to start repaying the loan.
On the other hand, you might not start making sales immediately.
It takes time to get enough customers to guarantee your business a steady inflow of cash. Unfortunately, this means that your company does not have a constant source of income for at least 4 to 6 months.
Yet, you are committed to repaying the business loan. Naturally, this will bring a lot of stress to you as a business owner.
Therefore, I recommend that you start your business with your funds. You can also use funds from family and friends.
Another way you can finance your business is to partner with someone else.
Recommended Reading: Top 3 reasons why you should consider registering your retirement business with the Corporate Affairs Commission (CAC) in Nigeria.
2. You will put at risk the property or land you bought while in service.
The second reason is that you put at risk the ownership of your property. Since you own a property, the bank will be willing to give you a loan. This way, there will be something for the bank to fall back on if you cannot repay your loan.
If you cannot repay the loan, it will be sad. It means that you have lost a place you wanted to live in or rent out. That means no place to live or no extra income from rent.
You can avoid this situation if you finance the business with your funds.
3. There is the tendency that you will borrow more than you need.
The third reason is that you will likely borrow more than you need. Since you have collateral security, the bank will probably offer you the money suitable to the value of your property. Banks are in business to make a profit. The more money, the better for the bank.
Humm, you think: “Not a bad deal.” “I can use some for the business and the rest to buy a new car.”
Not bad thinking until you have to repay a loan you took at a high-interest rate.
The second temptation you face when offered more than you need is spending it on your business. This case is worse than the first case. In this situation, you will end up setting up a company more extensive than what you can manage.
If this situation happens, you will lose money. So, I don’t advise you to start a large business if you cannot manage it.
Recommended Reading: 51 businesses you can start with 2 million Naira of less when you retire in Nigeria.
So, what should you do if taking a loan is not the best way to finance your retirement business?
The best way to finance your business is to use part of your savings or your gratuity. Using this method will not put you under pressure if you do not start making money quickly.
Another option to finance your business is contributions from family, friends, or well-wishers. The disadvantage of this is that they could interfere with the running of the company. After all, their money is in the business too. To avoid this, be clear about the terms of their contribution. Is it a loan or gift? If the financial assistance is a gift, when are you expected to repay it?
You can also consider partnering with someone who has the same business idea as you. It will help you combine resources. If you use this option, make sure that you register the business as a partnership. You should also clearly state the roles of each partner in your agreement.
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