Would you take it if I offered you a business loan of ₦1 million to pay back ₦1.3 million within a year?
Most African entrepreneurs will rush at this offer but wait till it is time to pay back; they will start running helter-skelter.
Well, let me break it down for you.
This loan offer means that you will be paying back at least ₦108,000 monthly or ₦3,600 daily.
In other words, you are paying back the ₦1 million plus 30 percent interest within 12 months (or 2.5 percent interest rate monthly).
Mind you, you are making a profit to pay your rent (if you have a physical office), pay your staff and buy inventories/running costs. You are making a profit to pay back the loan principal plus interest.
You are making a profit to pool back into the business. You are making a profit to pay yourself (no matter how small). If that is solely your source of income, you no go chop ni?
If you are making ₦4,000 daily to clear your debt, you must be making a profit of at least ₦8,000 daily.
For most African small businesses, making a net profit (NOT REVENUE) of ₦8,000 daily is the most challenging part.
With a ₦1 million investment, what business will fetch you at least ₦8,000 daily? Imagine always being in debt of ₦4,000 every day, even before waking up. That alone is scary and stressful.
Now, think about the offer again. Is it realistic? Is it achievable?
Well, the duration is long enough for an already established business to run with. It can be achievable by existing businesses with a solid customer base.
Since you have laid a foundation, a loan will only serve as a boost or catalyst. It also depends on the nature of your business.
This is why most lenders and financial institutions prefer to loan already established businesses rather than new businesses.
The problem is when you want to start a new business with a ₦1 million loan. It will be tough for a startup because you do not have a foothold in the market nor a payback means yet.
Startups shouldn’t take high-interest loans accompanied by pressure on the local currency with a short payback interval when you are not yet established in the market.
Taking a loan to start a new business is a significant risk. Imagine taking a loan to start a private school in Nigeria.
If you know how loan defaulters are often embarrassed, you will think twice before taking a loan. Some of these loan companies go to the extent of defamation and invasion of your data privacy.
If you have not experienced their invasive calls and texts, then you probably know someone who has. Recently, a loan company posted the obituary of a guy who missed payment.
I’m not saying this to scare you from taking loans. No! In fact, without a business loan, it might be challenging to scale your business, which could hinder your business’s growth.
A loan is one of the greatest assets in the hands of an intelligent entrepreneur. Most of the successful entrepreneurs you admire are in one debt or the other.
With a loan, you can achieve your business goals faster. As your business grows and develops, borrowing might indeed become inevitable.
For example, you might need to borrow money to expand the operations of your existing business, venture into a new business, or maintain your company’s day-to-day spending.
Every loan is neutral; it is either sweet or sour. It all depends on how intelligent you are.
While you may argue that a 2.5 percent interest rate monthly is not too bad, a loan interest rate should not exceed a single-digit yearly in an ideal business environment.
So far, even solid and existing businesses can fall victim to unforeseen circumstances inhibiting their ability to repay a loan.
For existing businesses, when it comes to borrowing loans for your business, there is some basic knowledge you must have, else you will make mistakes that will cost you your business.
Get SATURN (A Business Book for African Entrepreneurs) to learn the 10 Mistakes to Avoid When Borrowing Business Loans.
© Kingsley Ndimele
Your Reliable Consultant