Leaning on others when in need is a
way of life but we often confuse WANT
with NEED. Our list of wants can be
as long as it can be but accepting the reality that our resources are limited
is panacea to financial discipline. Focusing on what is necessary or our
immediate need is crucial. It’s true
that to grow our business, start that new venture, expand the existing line,
buy that new house or car, etc. we might need some support to bridge funding
gap or to ensure smooth running of the business.
The type of funding need, nature and
structure however differs and subject to the structure of the business, the
ownership, prevailing economic circumstances, operating cycle, revenue
generating potentials, etc. Request for assistance or loans are accessed for
the wrong reasons and without a proper analysis/understanding of the business/project
conversion cycles. Other means of solving the funding gap are never considered
with the wrong notion that loan is the only answer and end up destroying all
they have laboured to build.
No doubt, Capital is an essential
part of Factors of Production but
Capital is not only about money/cash. Level or nature of capital is subject to
the form of business or transaction dynamics and amount also varies. The
following should therefore be considered before taking that loan:
1. Look Inward:
Before you take that
plunge, take a critical look at your activity and processes, your operating
circle, affiliates/associations. Some of the questions that should readily come
to mind include: Is there any other alternative? Do I really need this? Can I
streamline my operations? Can I get additional credit from my suppliers? Will I
be better off as a partnership? Note the following:
·
Review your operating cycle to reduce the conversion period,
generate more cash and improve cashflow
·
Alternative sources of funding; friends, family, savings,
spontaneous finance, etc.
·
The injection of the loan should lead to increased revenue
and sufficient cash to service and repay the loan
·
Future plans and aspirations should be considered
·
Understand the 5 canons
2. Suitability of the loan/amount:
The type of loan and
proper matching with the current need/dynamics of the business is critical.
Using short terms funds to finance a long term asset/project is a mismatch or accessing
more/less could also lead diversion and/or stifling of the operations. Consider
the following:
·
Nature of the need and transaction
·
Project or estimated conversion/operating cycle
·
Match type of loan to project or transaction dynamics
·
Proper and effective matching of the tenor
·
Securitization
·
Match the cashflow generation to the repayment of the loan.
Can you handle it?
3. Cost benefit analysis:
The effect on the bottom
line of the business should also be considered. Will the loan lead to an
increase in revenue and profitability? Will it enhance the Return on Investment
and payment to all stakeholders? The following should be considered:
·
All inherent cost of the loan; financial and non-financial
·
Effect on the cost of the project or business
·
Positive Cashflow generation and repayment
·
Other repayment sources should the cashflow from the financed
activity fail
4. Discipline:
An Iceland proverb says
that “he who lives without discipline dies without honour”. Do you have what it
takes to be focused on the goal ahead? Do you have integrity to honour your
promises and ensure the funds are utilized effectively and repaid even if it
means denying yourself some benefits. Consider:
·
Your lifestyle
·
Associates and affiliations
·
Treat others the way you want to be treated
5. Be willing to ask for help:
The Bible says “my people
perish for lack of knowledge” Nobody has monopoly of knowledge. Be willing to
seek help in understanding, reviewing your processes, streamline your
operations or in packaging your request. Consider:
·
The effect of wrong decision on your family
·
Its far cheaper than the cost of the wrong decision on your
business
·
Better understand your business and expand your knowledge
base
The choice is yours to avoid the loan
death trap. The crux of the matter is the full understanding of your
operations, the conversion cycle of your business and its cash generating
ability as against the type of facility or loan. Don’t be afraid to ask for
help or take extra care before committing yourself. It’s better to be diligent
than sorry to avoid the stress of losing your business, property, health,
family and integrity/reputation you have struggled to build.
Your input and suggestions are
welcomed.
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