I am always amused whenever I mention a loan and see people freak. There is a reason for that. We are more likely to hear and see the negative effects of a loan gone bad than good. Naturally, we like to speak very little of loans, better let people think we did it all by our means. So you will hardly hear of anyone talking of how much loan they took and how it boosted them. What we hear is those few instances where someone took a loan and couldn’t repay and then came the recoveries and auctioneers.
A loan is just a savings turned inside out. Take for example, if you are able to get a loan of 500K to repay over the next 3 years. Isn’t it almost the same as having to save the money for the next 3 years only to end up with the 500k? Relying on either the savings or the loan has its pros and cons. Except that for entrepreneurs they need the money today and not in the next 3 years.
Build your credit profile
A credit profile is what can easily tell potential lenders what type of a borrower you are. Are you the type that borrows and repays, or that borrows and doesn’t repay. Nowadays, credit information sharing is making it possible for lenders to score your ability to absorb and repay loans. If you haven’t taken loans before then it means lenders have no information to score you on. Mostly likely then, you will have to qualify for small amounts as your profile builds. If you have negative listings with the credit reference bureaus then it means you are high risk and lenders need to tread with caution and in most cases you won’t get even a coin. If you are positively listed, then, it means your profile is very good and don’t be surprised to see lenders calling you to see if you can take their products. (next we will talk about credit profile and credit scoring and what it means for you and your business)
Here then, is what you should look for in a loan
Loans can be classified as development loans, consumer loans, business loans etc. Essentially, the classifications is based on the purpose for which the loans are lend. However, it is the borrower who ultimately knows the purpose for which they borrow. The key thing is therefore, to study the loans that are in the market to know how they fit into your needs. If you take the wrong loan for your needs it’s like trying to fit a square peg into a round hole. With a lot of struggle, it will get in somehow, but it won’t be worth it.
Picture a situation where someone borrows 500k for their businesses only to end up diverting 300k into debt repayment, school fees, buying a TV set, living it up (read touring, drinking and partying etc). Will a business that consumes only 200K be able to easily repay 500k? Hardly. Then you look at where the 300k went and you realize it can’t generate the money to repay the loan. That’s how trouble starts. Take a loan, invest for the purpose it’s meant.
This is the security that your lender will take for the duration of the loan. It gives them a psychological satisfaction that in case you may not ultimately repay their loans, then they will liquidate it to recover their money. It is therefore nice to know what security gets what loan. Nowadays, the law allows that you can use your chattels (small moveable assets like household stuff, stock, cows etc) to get loans. For higher amounts however, lenders will insist on log books and titles deeds. It is possible for lenders to take a combination of securities if one may not sufficiently cover. In case you are buying machinery and equipment, some lender will be able to take the same as part of the security. Sometimes, lenders holding your security will enable them to lend you other additional smaller loans without much hustle e.g. (overdraft facility, LPOs and LSOs etc. What use is that log book or title deed in the box when it can be out there getting you capital to do business?
A bigger challenge with most loans is that they will either be too little or too much as per the current needs. If you get a smaller loan, it may mean you are not going to sufficiently cover the needs of your business. Just like food, you want to eat just enough. Not too little as to leave you rummaging through the fridge for left overs and not too much as to leave you constipated. If the money that went into business was not sufficient to make any impact then it will be a struggle to repay. You have seen so many borrower who couldn’t finish the project for which they borrowed and now have to repay from other sources. In many cases they resort to informal lending that can be extremely exploitative.
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4. Repayment Duration
The loan you get will have a number of months or years within which you will repay. Some people are so much in hurry to finish repaying their loans as if they are going somewhere. Where? You are still here and your business is still here and we want it to be around even longer after you leave. So take loans. Better if they are to be repaid over the longest possible period. It makes the monthly installments smaller and bearable. Find the possibilities of getting top-ups before you finish repaying. It’s always best to use someone’s money to fund your business rather than struggle raising the money yourself
5. Repayment Terms
After you are comfortable with the duration, then its best to consider whether the loan is to be repaid weekly, monthly, quarterly etc. This is critical for most SMEs. Most businesses will make money and are profitable, but maybe their money doesn’t come every week or every month. Maybe it comes in bulk once every two or three months. Look for loans that will suit your repayment abilities. Talk to your lenders to understand why you can only pay once in 3 months. From experience, I know SMEs that got a huge boost because they were allowed to delay repayments a month or so.
You must always check to ensure that your loan is insured. For most formal lenders, they take loan group life covers for their loans. Others may not. Such insurance is active for the life of the loan. It comes in if in case you may not be able to continue repaying your loan, say in case of, death or permanent disability, then, no one will come bother your business or family. Please NOTE, such insurance only covers when there is justifiable cause why you can’t repay. Not you choosing to repay or not. You need separate insurance for the business related risks.
7. Interest, Fees and Penalties
Have you heard that the devil is in the details? The details are always contained in the small print of the contract document that most of us don’t read. In fact, most borrowers want only to be shown where to sign and get on with the loan processing because they need it yesterday. A friend once told me the contract is standard and can’t be changed for you alone if you disagree with some of the terms. The truth is that they can be changed. But even if it’s not easy to change, isn’t it better to know and be forewarned rather than be surprised when the reality sets in? What interest does the loan attract? Is it on reducing or flat rate? What other fees and penalties will the lender take from you? Know them beforehand. Did you know there are lenders who will even punish you for early repayment or settlement of your loans?
Although the loan contract you sign will lay out the repayment terms, there are a few times you may not be able to meet your repayment obligations. It is therefore important to know how flexible your lender is in case of such instances. Most formal lenders will not want to rush to punish you if they can wait a few more months. But they wait because you are engaging them and updating them on how your business is faring and how your loan repayment is coming along. Warn them early if you anticipate delays and work out a solution with them. You will be surprised that it is very possible your lender can reschedule your loans, restructure your loans or even advance you an additional loan to see you through the difficult phase. Don’t run, at least don’t run to hide. Run to your lender to talk to them.
A loan therefore, will not be considered good because it has little interest. It is all these factors combined that will determine how good it is. Interest is one of them. You therefore need to find a loan that strikes a balance between all these.
There are many other things you would look for. Please share them with us in the comment section below.