Loans, loans, loans!! We have all heard these scary things and stories about them.
We all have a friend who has advised us never to consider taking one or a friend that has sworn never to ever take another one again. Loans are one of quickest sources of capital for business start-up and growth and can go a long way changing the fortunes of your business if handled well.
The reason most people never get the most out of loans is because they don’t think through the loan acquisition process with proper clarity. Questions like, do I really need a loan?
How much exactly do I need? Is this the cheapest source of debt I can come across? How am I going to pay the loan?
What payment plan do I have? What if that plan falls flat, what’s plan B? What credit option works best? Should I take a long term or short term loan?
Very few people ask themselves these questions so they go after a loan without clear answers to some of the most pertinent questions regarding debt acquisition forgetting this is money you have to pay back with an interest.
I spoke with Mrs. Kalema Martha a portfolio Manager at Bank Of Uganda to understand the things a business owner should look out for before they go for a loan and below are the things you may want to think about before you take that loan.
Understand the purpose of the loan
Why are you taking this loan? Is it for renovation and refurbishment, staffing or expansion? Failing to specify what you exactly need the loan for may see you misusing the money Martha says.
Work out the purpose of the loan
“This is another important thing to take into consideration” Martha stresses. How much exactly do you need? Taking more than you need or less will get you into a tricky place financially, where you may either have more than you need and end up misusing the surplus or getting less than you need and the loan doesn’t deliver on the purpose for which it was intendend.
Calculate what you can afford to repay
It’s so important to know how much you can pay say in monthly instalments.
This will help you come up with a payment plan that’s within your means. There’s no bigger nightmare than having a payment plan you can’t afford.
Most people just give a figure of head and when time to pay the loan comes reality sets in. They don’t earn enough to afford to pay the amounts they committed themselves too.
Decide between a secured or unsecured loan
Truth be told there are no totally unsecured loans in the financial services industry like Martha notes. She admits that there are individual money lenders out there that are willing to lend with no security though.
“Financially speaking it makes more sense for a borrower to take an unsecured loan because all the risk is kind of on the lender” Martha states.
Choose a fixed or variable interest rate
As you go for a loan decide whether you will go for a loan with fixed interest rates or variable rates. Martha says this depends on the environment you intend to invest in. If you think the central bank is going to increase its rates then you should go with a fixed rate.
On the other hand, if you believe they are going to decrease their rates then it would be wise to go with a variable rate. She says that unfortunately, most people don’t know that even if you are on a fixed rate and the prime rate goes down you can still go and negotiate with your bank to lower your rate.
They may decline to do so but if you make a convincing argument they may actually be a little more flexible. If they totally refuse to do even after putting up what you think is convincing argument then you can ask them to sell your loan to another bank that could be a little more flexible.
To be honest it almost impossible to grow a business without a loan at all since business growth will need huge capital injections every now and then and if handled very well a loan could be the easiest way to raise capital for both start up and growth. Let me know if you found this useful. In case you had something to add please do so in the comments section below.
Jaluum Herberts Luwizza is Business Consultant, Writer and Public Speaker with YOUNG TREPS a business management and consulting firm that helps people start, run and grow profitable and sustainable businesses.