The Dangers of going into Debt
In my observation, your chances of surviving the first three years in business diminish greatly if your funding depends on a loan or overdraft.
Here is a typical case study:
Tom decides to become self employed, so he buys a convenience store for $250K including stock. His accountant verifies that the business has been clearing an average of $2000 per week before tax. Tom has a $50K deposit and borrows the rest from the bank at 10% interest. As is often the case, Tom finds that the advertised figures were quite different from "real life" figures and the best he can manage is a gross profit of $1500 per week. He also finds that in order to keep the stock turning, he needs a further $30K. Since he already reached his overdraft limit, he has no alternative but to put the additional amount on his credit cards at 20% interest. This puts his net profit after tax and interest at $900 - not exactly the kind of income that inspires a 60 hour working week. In the coming years, interest rates rise by 2% and margins are squeezed due to competition. By the end of year three, Tom is only clearing $1200 before tax and interest which translates to $700 net. Not surprisingly, Tom wants out, but unfortunately the best offer he gets is $125K, which is $55K short of what he owes the bank.
Even without a loan the outcome in the above case would have been less than ideal, but owing money can make the difference between simply walking away from abusiness and bankruptcy followed by years of hardship.
The moral of the story is: If you need to finance more than 25% of the purchase price of your business, you are not ready to buy one. Wait until you build up your funds before you take the plunge and of course, call us for a pre purchase inspection.
