Is it better to start a new business using credit, even when I have money to invest

Question

Suppose I have to start a new Limited Liability Company and the initial investment is 50000 dollars. Let's also suppose I have that money. No problem about it!

Now let's suppose something goes wrong with the company and it fails. That means I would lose all that money.

In a different scenario instead, let's suppose I invest 50000 dollars using bank credit or investments from third parties. Now, the company fails, and being a Limited Liability Company, that would mean that creditors/investors lose all their money... but not me!

Is that correct? Does that mean it's wiser to start a new company using credit, rather than our own money?

Answer 1

Here is what you are missing:

If you have a new LLC with no credit history, no one is going to lend your LLC alone $50,000. If you have good credit, you might be able to convince a bank to lend you $50,000, but only if you personally are also responsible for the loan.

Banks are not stupid, and they won't let you get away with taking a loan that will simply disappear the next day when you decide to close your business.

Now, given that, it is wiser, in my opinion, given your scenario, to use your money to start the company, rather than to take a loan. Here is why:

Let's say that things don't go according to plan, and the business doesn't take off as quickly as you had hoped. With the loan, you will have loan payments that need to be made. This puts extra pressure on your business and takes cash away from the business. Without a loan, it is easier for the business to survive a downturn longer. Taking a business loan increases the expenses and risk for the business.

If, instead of a loan, you are talking about raising money from third-party investors, that is different. By taking on other investors, you move the risk from yourself to your investors. Remember, however, that you are also moving the profit from yourself to the investors.

Answer 2

In a roundabout way you are describing fraud. One intends to borrow money and not pay it back and use an LLC as a shield to avoid any negative repercussions from such a transaction. Yes, that is fraud.

Banks are generally smart about getting money from their customers and not losing it through a silly legal loophole. Lets say you do have a viable business idea, and plan. One that is worthy of loaning money a bank will lend a LLC money provided that the founders have a sufficient credit history and assets that can be pledged against the loan. Yes a bank can loan an LLC money and use owner assets for collateral.

Owning and running a business is very difficult and expenses are difficult to control. Borrowing money to fund a new business increases the risk then the hard numbers would suggest as when we borrow, we tend to spend more.

Bootstrapping a business as a part time project carries minimal risk and offers, IMHO, the best chance of creating a profitable, viable venture. You will make mistakes along the way, and doing so that way allows you to learn those mistakes without bankrupting you.

The first time you have a payroll you will be shocked at the difference between the amount the employee receives and what you have to fund.