Business Experts Claim Business Loans Are Unnecessary
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UPDATED: Jun 26, 2013
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Not all business experts believe that borrowing a commercial loan is a necessary step in building a successful business.
In fact, billionaire Mark Cuban said in a recent interview that only “morons” borrow commercial loans.
In order to verify if this was true, loans.org spoke with experienced entrepreneurs who have succeeded with and without borrowing business loans.
Yes, Only Morons Borrow Commercial Loans
Tanya Brown, Creative Director of Lauren St. Julian, told loans.org that she agreed with Mark Cuban.
She explained that her online jewelry business was created by “bootstrapping” and only dealing in cash. While she agrees that she could have taken out loans to accelerate business, she never wanted to be in a position where she was desperate for cash to make commercial loan payments.
Now that she is operating a successful business without any commercial loan debt she gets to divert all profits back into the business.
“I have seen in my travels so many entrepreneurs who were so desperate (not hungry, as there is a difference) for business that you could smell the desperation,” she said. “Business loans also stifle your creativity because your focus is on ROI not anything else.”
Brown feels that even if she had borrowed a commercial loan, it would not have made her successful faster and the added stress would have been counterproductive.
As a successful business owner, Brown isn’t alone in her agreement with Cuban.
Robert Smith, owner of Champion Media Worldwide, claims to have started his first business with less than $100 back in 1996. However, he did try to borrow a business loan at first.
Reason being: he felt he had to borrow financing in order to be successful.
“We are programmed to think that we need financing and no one teaches how to grow organically with very little money,” he said. “I have a marketing firm, Champion Media Worldwide, and I approached companies that had similar customer base but didn’t sell my services. Until I found out about strategic partnerships, I was always looking for security of a loan but then you have to pay that back so you are vulnerable and there is risk.”
Smith advises entrepreneurs to examine themselves to determine if they really need a loan. He recounted a woman who wanted to open a bakery yet lacked the capital to afford an oven, let alone a location. Fortunately, she found a bakery that was closed at night and baked her cookies in exchange for a share of the profits and in lieu of paying rent.
“If you are creative and persistent enough, all businesses can run without financing,” said Smith.
He agreed with Brown that the burden of a business loan would have simply been additional stress in the already stressful life of an entrepreneur.
Jeff Kear, owner of Planning Pod, also agreed with Cuban’s blunt statements but explained that entrepreneurs should be looking at something far more important than commercial financing.
“Many entrepreneurs need to first find out if their business can be profitable, and any bank or lending institution that gives them a loan without being fairly confident they can pay it back is foolish,” said Kear. “Then, once an entrepreneur starts to make money, they need that money to either pay their personal bills or to put back into their business. So when the first thing you do is have to pay off a loan, it hamstrings you from the start.”
These supportive entrepreneurs aside, an equal number of successful businessmen and businesswoman disagreed with Mark Cuban’s assessment of commercial loan borrowers.
No, Commercial Loans Help Entrepreneurs
Bryce Avery, President of Avery Enterprises, told loans.org that while his first business was launched without a business loan, he borrowed one for his second business in order to help pay employees. By hiring employees and paying them with commercial loan funds, Avery was able to avoid using his personal savings on a venture that may not have worked out.
“In my case, the bank requires one interest payment per month-and takes the interest payment directly out of my bank account with them,” said Avery. “Thus, the amount I owe is not compounding with interest, as it would with a credit card.”
Paralleling his own experience, Avery advises entrepreneurs to save loans for a second business and not the first one, especially if they are a brand new entrepreneur.
Ian Szalinski, President of Muesli Fusion, agrees with Avery that, at some point, capital may be critical to a business’ success.
“I started my business in late 2010 and put every penny I had into the company to test the market and products,” he said. “In late 2012, business was going well but cash flow was tight. I look out an SBA loan and line of credit that has allowed my business to grow to over $1 million in sales and have six employees.”
He also pointed out that Chobani, the Greek yogurt business juggernaut, was started with a business loan, and has grown to over $1 billion sales and 3,500+ employees.
Even though not all businesses reach the size of Chobani, the success of that Greek yogurt business demonstrates how profitable borrowing a business loan can be for entrepreneurs.
Fabienne Laveau, Garden Muse and Wedding Muse owner, shared with loans.org that neither her landscape design business nor her wedding floral company have ever taken on any debt. However, that does not mean she has ruled out the possibility of obtaining financing.
She explained that she would have felt it a risky gamble to take on a business loan — and she is not a gambler. However, the idea of borrowing a business loan is a tempting proposition for Laveau.
“Maybe $20,000 or so to get some essentials,” she said. “I still think of it from time to time, for particular strategies.”
She believes that a business loan would have helped her pay for advertising, a good vehicle, and tools. Despite forgoing financing and experiencing success, Laveau understands that business loans can give people advantages in jumpstarting their businesses.
As for if business loan borrowers are morons, Laveau couldn’t disagree with Cuban more.
“I know a lot of small business owners and they fall into two camps, those who are conservative and unsure about their chance of success and those who believe undoubtedly that they will make it,” she said. “Not one of them is unintelligent, if that is what he means by using such an unfortunate term.”
Laveau also believes that business loan borrowers do not necessarily do better than non-financed entrepreneurs.
“I think there are so many other variables that factor in, such as personality, tenacity, talent, strategy and luck, that money is but one part of the equation,” she said. “People are motivated differently and an important piece is finding the way that will keep you authentic, which will make people drawn to you. We have all heard of companies that started out strong and failed. Capital doesn’t guarantee success. With or without funds, you have to prove yourself.”