When business borrowing is a bad idea

In an era where there have never been more options when it comes to business finance, Jonathan Kettle, founder of Taxicode, argues that no external investment at all is the best course to sail.

There are very few businesses that haven’t approached, or at least thought of, applying for external funding. Modern business practice tends to lean towards this route as a means to getting a business idea off the ground. But is it really a good idea to throw money at an idea or a new business before it has even proven it can make money?

Having grown several businesses from the ground up, with zero external investment, successful businessman Jonathan Kettle discusses his views on the issue business borrowing.

I can understand why business owners are drawn to the idea of external investment. Apart from it being very much an ego boost (someone else other than me thinks I’m on to something), it can seem a logical way to get a business off the ground and trading in a relatively short space of time.

There are many businesses out there that have succeeded precisely because they were given funding early on in the life of the business, but would these businesses have been just as successful if they’d grown under their own steam, albeit at a slower pace? I guess that’s something we’ll never know.

I often think that shows like Dragons’ Den have made people think two things:
1) You have to have investment to start a business
2) That you can’t trust your own instinct on whether a business idea is any good. If a Dragon says it’s not, then you must assume it was a bad idea, scrap it and retreat with your tail between your legs.

Let’s explore these two points a little further.

1) You have to have investment to start a business

One of the biggest challenges facing new businesses today is the issue of funding. My view is don’t borrow money to get started unless you really have to. It’s much harder to turn £10 in £20 through business than you think. If you need a van then yes lease, but don’t think a £20,000 loan will make you any money. You could well find yourself living off the loan and not making any more. Then you’re just in debt with an unprofitable business. Your idea does not have to be perfect from day one, but make sure it will make you money.

I’m not saying that investment isn’t useful and in some cases necessary, but I do think that we’re now in a business environment where it is considered an essential part of a business growth strategy, rather than an optional one. I’d like to take this opportunity to challenge you to not rely on others to fund your ideas, but to get out there and prove your business model works and most importantly, can make money.

You might be reading this thinking, ‘that’s all very well and good Jonathan, but in my industry, everyone is getting funding and we’ll be left behind if we don’t.’ I can understand this view and I too am running a business with competitors who are receiving millions of pounds of investment whilst we are continuing to expand and grow under our own steam. Is it frustrating to see them take leaps and bounds that we are physically unable to do? Yes sometimes. Does it mean we won’t reap the rewards of our commitment to organic growth? Not all all.

Ok, we’ve not got millions in the bank, but we’ve grown our business from £0 in 2011, to a healthy six-figure revenue by 2013. No funding or investors means that we own that entire business. So figuratively speaking, is it better to own a small percentage of a bigger operation, or retain 100 per cent control and subsequent profit from a smaller business that has the potential to keep growing?

2) You can’t trust your own instincts on whether a business idea is any good

Some of the most successful business people of our time didn’t get it right first time, or were turned away at crucial points in the growth of their business. Steve Jobs didn’t always have people backing his corner, but his business and brand has transformed an entire generation in terms of the role technology plays in both our business and our personal lives.

‘I have not failed. I’ve just found 10,000 ways that won’t work.’ – Thomas Edison

Too often, the focus is on immediate success, which means we often see higher failure rates too. Today’s entrepreneurs are a bit like old-fashioned inventors, when you’re trying to create something new just be prepared to have many, many goes it before you find something that works. The 40 in WD40 stands for the 40th attempt. Thomas Edison’s light bulb took him more than 1000 attempts.

When it comes to ideas for new products and services, it’s not about coming up with something totally new either. Most markets are not saturated as many would have you believe and you can always find a new idea of a new take on something. When something new is created like Twitter for example it does not mean that is that idea done and dusted. It has the potential to act instead as a catalyst, something which provides yet more opportunities to create an idea that works because of its existence.

Grow as your income grows

As a business owner whose has started several business from scratch, I’ve seen the benefits that come from growing in line with your income. Make money, then invest that money to grow more in order to make more. It seems a simply strategy, but you’ll be surprised how challenging it can be to keep to it in the face of business credit, start up loans and angel investment.

Most businesses could operate much leaner than they do and could be more profitable as a result. So ask yourself, how much are you spending on things you don’t really need or don’t contribute to the business? How much more could you make if you did things differently?

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for GrowthBusiness.co.uk from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

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