Financing a Small Business Is Risky

Dear Dave,

What's the best way to finance a business I want to buy?

Anonymous

Dear Anonymous,

When you borrow money to start a business you're introducing a huge risk factor into the equation. I don't borrow money, so I really can't recommend that you go into debt. Saving up and paying cash is the best way to go.

The only other thing I would consider doing that would lower your risk would be an owner-financed deal. The current owner finances the transaction, and your pay to them is based on the profitability of the business. That way, if there's no profitability you're not bankrupt!

Some people will go out and borrow $500,000 or more to start a business. Then, if the business doesn't do well and you can't make the payments, you're bankrupt. There's really no in-between, and that's a bad deal!

It's just a dumb idea to do these "all or nothing" business deals. Even if owning a business is your wildest dream, there's no point in taking risks like that. It's just not necessary!

- Dave

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