Only morons start their business on a loan. How do I know?
Because I’ve been that moron.
Years ago, before I knew this, I went and got a loan to start a new business. Not only that, but I got a loan with a personal guarantee, which meant my income and assets were now on the line if things went south with the business… which they did when my partner went bankrupt.
After five years, we had a balloon payment on the loan and the bank came demanding their pound of flesh. I told them I didn’t have the funds to stroke them a check, to which they told me not only would they foreclose on the business if I didn’t pay up, but they would also seize my assets and income, which they had the power to do as part of the personal guarantee.
If you wonder why I have grey hair, it was from that time in my life! Thankfully, I got things sorted out with the bank, but I learned a powerful lesson: don’t start a business on a loan.
There’s a better way to do things that reduces your risk and leads to better outcomes for you, the business, and your customers. That’s what we’re going to cover in this article. But first, we have to more fully explore the idea that getting a loan to start your business is a bad idea.
The Downsides of Getting a Loan
Let’s start with the obvious: when you take out a loan, you have to pay it back on time. That’s stressful! Especially when you’re starting a business that is going to throw curveballs at you that you didn’t see coming in your wildest dreams. Even the best laid plans can’t predict with 100% accuracy where your business will go, but do you know what you can count on?
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The bank demanding that your loan be paid back on time. There’s no uncertainty there.
The stress of having to pay back that loan can indirectly affect your loved ones, as you try to manage the demands of running a business and deal with the weight of expectations. As we saw with my story, loan-related stress also affects relationships with business partners.
Then there are the more tangible downsides. With a loan, you’re paying interest instead of earning it, which is never a position I want to be in if I have other options.
You also have a huge time loss involved with applying for a loan. I’ve seen people waste six months jumping through all the hoops required by the loan application process.
Some types of loans can impact your credit score, so when you go to buy a car or get a credit card, you’ll be paying higher interest rates because of that hit to your credit. Other loans require a personal guarantee, which is a surefire way to crank your stress levels up to 11.
Building Your Business Through Connections
Despite all these drawbacks, getting a loan to start your business has become almost standard procedure for entrepreneurs at this point. Got an idea for a product or service? Your first stop will be the bank! After all, how else are you going to get the funds you need to launch?
My answer is: your customers. Why not have them finance your business instead of the bank? That way, you can create momentum without going into debt. You pre-sell your offering, then have the people who wrote the check give you feedback on what improvements to make.
Building your business on connections instead of loans massively lowers your risk, improves your cash flow, helps you sleep better at night, and will make your wealthier.
Crowdfunding has become a phenomenon for this very reason. If you have a new product you want to build, you can gather supporters who want to see that idea come to life on sites like Kickstarter and Indiegogo, and offer them perks in exchange for their financial support.
I call this “win first, then play.” Sports teams, in combination with event venues, do this all the time. They get the money for an event before it even happens. Authors do this when they take pre-orders before their book ever comes out, guaranteeing them a certain level of revenue right off the bat. With my book Killing Sacred Cows, we had 22,000 preorders from financial professionals who paid to be first in line to share the book with their clients.
The book was profitable before it ever launched. That’s win first, then play!
How to Win First, Then Play
I’ll give you another example of how you can do this in your business. When I did my first video series, we raised $150,000 before we even started. We asked people what they wanted to see and offered them a 50% discount because they weren’t going to get all the videos upfront. This beta group gave us invaluable feedback and provided us with case studies to use later.
That leads me to the process for how to win, then play. First, get customers to pay for your idea upfront. You’re looking for the minimum viable product that you can pre-sell people. This will provide you with the funds to start your business and give you a built-in customer base.
Once you get money from the people who want what you’re offering, be sure to gather customer feedback through surveys. Test your ideas on the people writing you checks, not just family and friends that love you, and keep what they tell you in mind as you build your business.
The feedback on our Fast Track program told us that customers wanted tests, guides, and transcripts. With this feedback, we made the program more valuable as we built it out.
At the end of the beta process, you’ll either have an insane amount of momentum with your original idea or you’ll have pivoted to an even better one. Best of all, you’ll have made money the entire time instead of borrowing it. You’ll have a business and won’t owe the bank a dime.