DEATH BY CHOICE

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.

Michael Ajayi:  Michael@bizadvisory.tk or majayi@emoyolgroup.com