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Should You Go Into Debt to Start a Business?

Jennifer Birtles 22nd May 2020 3 Comments

Reading Time: 6 minutes

As the saying goes you must spend money to make money. This is definitely true when you start a business. Things like registering your business name, website hosting, and creating a space to work from all cost money. Although there are ways to minimise these costs.

So, the short answer is yes, expect to go into debt while you initially invest in your business but you need to make sure you take all the necessary precautions, such as funding as much initial capital as you can and making sure you have plans in place on how you plan to manage debt you take on.

Starting Out With No Money

Start a business with little to no money - it's possible!

When you want to start a business with limited funds, make sure everything you spend money on is essential to your business. Ask yourself what you can do, or get, for free instead.

If you’re just starting out selling products or services, instead of throwing a lot of cash at an expensive custom-made website, start off by creating social media pages for your business and advertising freely on there. Facebook Business pages are easy to set up and use, and as you begin to sell your product, people can leave you reviews and ratings which will help to grow your business. If you’re selling products, setting up an Etsy page is a good place to start. You can start selling items immediately with little outgoing costs – Etsy takes a 5% transaction fee on the cost of the product.

You can also set up a free website on WordPress which you can upgrade at a later date to a professional domain name. However, there are so many cheap domain registration sites like 123Reg and GoDaddy that offer special first-year discounts, it could be worth paying for a website name right away – some are as cheap as 99p for the whole year! You’ll look professional from the start, and can set up business email addresses to your .com or .co.uk domain.

Don’t Get Buried in Debt

Initially, while you invest in your business, debt is likely to happen. Before you take any business venture on make sure it is manageable for you. If you apply for a small business loan, work out exactly what you’ll need for essential spending and only apply for that – don’t be tempted to ask for the full amount available. Remember this money does have to be paid back!

Consider Going Limited

When you start a business, think about your financial liability. Setting up as a sole trader is very easy. However, if you take out a loan as a sole trader, you’re also personally liable for the debt. So, if your business can’t pay it back, you have to make repayments from your own pocket. Creating a Limited (Ltd) company takes a little extra paperwork and a small cost to set up, but your loans are linked to the business and not your personal bank account. So, if your business doesn’t work out, you won’t need to dip into personal savings to repay loans (nor will your credit score be affected).

A limited company is a private company whose owners are only responsible for its debts up to the amount of capital they invested themselves. So, if you put in £2,000 of your own money into the company, that’s the maximum you’re personally liable for.  A limited company is its own legal entity, so any profits and losses belong to the business and are separate from your own personal finances.

Bear in mind that if you set up as a limited company you are responsible for submitting various file accounts and returns to HMRC and Companies House. As a director, you have a duty to keep both informed about your business and are responsible for submitting the paperwork.

Don’t rush into any decision but carefully review your options to work out which is the best one for you.

Manage debt with budgets

To start a business, you’ll need to lay out some upfront costs for products, services, and marketing. It’s easy to get carried away and lose track. As you begin to spend on your business make sure to track your expenses so you know exactly where the money is going and regularly review it. Create a budget as part of your business plan – before you apply for any financial support – and stick to it as much as you can.

It is also worthwhile to have a back up plan in place in case your business does fail – think about how you’ll still manage to pay back your debt. Consider options such as the likelihood you could get a job in a previous career, or moving in with family to reduce living costs and earn the money to pay back the debt.

Help You Can Get

Somewhat surprisingly, there is actually a vast amount of help available to those setting up a business or transitioning into becoming self-employed. There are options for financial support, business grants, and mentorship schemes.

Universal Credit

You can continue to receive Universal Credit payments for each month when you’re earning below a certain amount. That means until your business earns a steady income you can still get some financial support.

Business Mentorship and Grants

Government databases are a good place to look for small business grants, also search in your local community to see if there are local funding opportunities. Your local Job Centre and Citizens Advice Bureau will have all the information you may need for accessing local business mentorship schemes, potentially giving you access to networking opportunities and cheap workshops.

Prince of Wales Trust

The Prince of Wales Trust is for entrepreneurs aged between 18-30 years old. There’s access to free information sessions in your local area, workshops, and you are provided with your own mentor and they’ll help you apply for funding.

That’s just the start of your funding options, too! Look at your full extent of options in our article that covers all the benefits and funding available to the newly self-employed.

Ways to Fund Your Business

Fund your new business

As you start up your business consider the different ways you can find capital and their individual pros and cons to work out which ones will be most suitable for you.

Business and Bank Loans

There is an overwhelming amount of business and personal loans available so it is well worth taking the time to research for one with the lowest interest rates and best suited for you.

The Government offers a Start Up business loan of between £500 – £25,000, also giving you free guidance on writing a business plan and up to 12 months free mentoring.

Small Business Administration (SBA) loans may help your business as well. They are business loans partially guaranteed by the government and can range massively in amounts from a few hundred pounds to hundreds of thousands.

You can even pick loan products from lenders that cater to businesses which have experienced money issues in the past, and are looking to get on the right track. For instance, packages from the likes of Advancepoint Capital can help with recovery post business financial strain, providing stability and repayment affordability.


Crowdfunding allows you to pitch your business for investments online. Including as much detail as possible about you, your business, and your products will make it more likely for people to invest. In return, you offer them something, often depending on the size of the donation, such as a free sample of your product, or crediting them.

Angel Investment

An angel investor provides capital for a business start up usually in exchange for equity. Look at angel investor platforms to start, speak to several different investors before deciding, and make sure to read the small print so you know what you’re committing to.

Read even more ideas about funding your new business here.

More Useful Reading

Feeling inspired? It’s entirely possible to start a business on a bootstrap budget! Find out more with these articles:

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3 years ago

Debt is never a good idea, but if there is no option then first thing to do is to look for how to reduce the debt. otherwise it will keep on increasing.

3 years ago

Good advice, think it’s better to avoid any debt if you can.

3 years ago

Great article. Thanks.

Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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