Evan Carmichael explains why most small businesses shouldn't take loans to expand. Validate your product and perfect your processes first. Only borrow when demand exceeds your current capacity, like the salsa studio that rented cheap gym space, built a system, then moved to a real location once it was packed.
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Should I take a loan out for my business? So I got a really great question from one of my newsletter readers— love you guys— Toba, who wrote in to say, good morning Evan, thanks for all your emails, they've been quite helpful and inspiring. However, I'm confused about something. I run a jewelry-making business and it's still small. I really need to get an office to ensure more sales and to embark on the next phase of my plan, which is starting a training center. But a lot of friends and colleagues are advising against it, saying it's not yet time, and I should I should hold on till I can conveniently afford it without taking a loan or asking for favors, but my gut is telling me the time is now and I should take the risk even if it involves a loan. I don't know. Please, what do you think, Evan? Toba. This is a great question, Toba, and I don't know much about the jewelry business, but it doesn't matter because this is a bare-bones, hardcore basic of running a successful company, in my opinion. One of my principles is I hate spending money until I'm making money. I hate spending money until I'm making money, because anybody can spend money, right? Anybody! You can go out and take out that loan and create a training center and expand your jewelry business. You could spend it on a million different things. It's so easy to go out and spend money, but not everybody can make money. That's the hard part. And so I want you to be making money before you go out and spend money. Now to answer this question, it really depends for me on what stage your business is at. Okay, you're not just the startup, you're not just, "Hey, I have an idea." This is the mistake most entrepreneurs make or a lot of entrepreneurs make. "Hey, I have an idea. I'm going to start a jewelry business. So I'm going to go out and get a store. That's the first thing I need, right? I need a store." And then you blow through all your cash because you make so many mistakes because you don't know what you're doing. You haven't perfected your process. And so your company fails. You shut down and you've lost your savings, you may lose your house. You've mortgaged your future for this big bet that didn't work out because you didn't give yourself the best chance at success. That's what a lot of entrepreneurs do. What you need to do is figure out a system that works. You start small, you build up, you get customers, you understand your product, you get traction. The reason why you want to be expanding, I don't know where you're starting now, if you're at home, you have a little stall, whatever. You want to expand when you're busting at the seams. When you can't handle any more business in your location, that's when you want to expand. If that means taking on a loan to finance something bigger, fine. But you got to be busting at the seams right now. If you're not there yet, then don't go and expand. Because a lot of people think, and this is a huge mistake, a lot of people think, well, if I had a store, if I was in this location, things will be better. You can't count on that location to save you. It's not gonna save you. You have to figure out your process, your products, your planning now and make it work on a small scale wherever you are until you can't handle it anymore because you're growing too quickly. Then you're ready to expand. Let me tell you a quick story. I'm an investor in a salsa dancing business here in Toronto. Will teach 6,000 people a year how to dance salsa. When the company was started, it was started by one person, and she started by renting out studio space from a gym. So you have your gym club membership, and they had studios where they had classes, but at nights it didn't always fill up the classes, so she would rent from their space. It was great for them because the space was just sitting empty. It was great for her because she didn't have to invest into a huge space, and she's spending $25, $30, $35 an hour to rent the space. Okay, not that much money compared to getting your own location. For her, that would mean she charges students $13 an hour. That would mean getting 2 to 3 students to break even. She had 3 students in the class, she would break even and she would start making money and she could pay herself. And that's how she started. Most people would do the opposite, be like, I'm gonna start a dance studio, I need to go open a dance studio. And they're gonna pick a location, and they're gonna lose their shirts and be out of business in 6 months. Where you wanna start small. Rent from the gyms. She built up her business to the point where she couldn't handle any more students, right? She could only have 40 students in a class, and the gyms were only giving her so much time, and she had all these people who wanted to now join her classes as she built it up and built a reputation and fixed her product and built her curriculum and understood how to market her business properly. She built up all this momentum, and she was was busting at the seams and she was ready to expand. And so she, she went out and she got her own location, and her location now is in a great spot, and it costs her $100,000 a year. The rent is $100,000 a year to run this studio. And if she went out and just started and took out a loan and did that at the beginning, she would have failed because there's so many She didn't have the process, she didn't have the marketing, she didn't have the curriculum, she didn't have the right product. She had to learn all that and make it better. And she knew she was right when she was busting at the seams coming from those clubs. So what I would encourage you to do, I don't know what your situation is right now, but you gotta look at it. If you are thinking that this location is, that's it, that's the savior, my business isn't working, it's not going so well, I need a new location. That's my answer? It's not the answer. You need to fix your business. You need to market your business now. You need to fix your products, you need to fix your service, you need to fix your processes to the point where you are busting at the seams, you cannot handle any more business from where you are, and now you're ready to expand. And if that means taking on a loan, that's fine because you know you're going to be able to pay that back really quickly because of the huge momentum and marketing that you have behind it. Don't spend money until you're making money. Belief. For those of you watching, like the video, you can subscribe to the channel, see more videos just like this. Thank you so much. I'll see you soon.
