TODAY, we take look at business loans as a way of financing business operations.
More than three weeks ago I looked at various ways of financing a business of which a business loan was one of them.
Today, I have decided to look at business loan and go into details of financing a business and determine at which stage a business should fall back on a loan as a way of financing.
As most of you may be aware, a business may during its life span want to increase operational capacity and that its finances at that stage may not allow it to do so.
In this case, it may look to outside sources for financing.
One that may come to mind is to borrow money to inject into a business for its intentions.
Commercial banks to mention the obvious lenders are positioned to lend money to businesses because that is one way for them to increase their income base among others.
However, for a bank or any money lender to release money to the borrower, they take necessary measures to safe guard their resources by ensuring that they demand security from the borrower to guarantee the safety of their money.
Most money lenders demand collateral such as property supported by title deeds as a form of security among others.
The primary objective for the banks is to lend money to the borrower at interest so that at the end of the day it makes its own income.
However the demand for collateral from the borrower comes in as a last resort.
This is after the borrower fails to pay back the loan and any other normal ways to recover the money fails.
It is not the intention of the banks to recover the money by falling on collateral, no! But that it has to replace the money and continue to run as a bank.
In my article I want to share with my readers especially the small and medium enterprises (SMEs) at what stage it becomes necessary for one to borrow for business intentions.
I say so because according to the experiences I have had I discovered that some SMEs borrow money from the banks to sort out pressing problems with no regard as to how the money would be paid back.
Others borrow to buy personal items that have nothing to do with businesses causing problems when time to pay comes up.
I must advise here that getting a loan should be for a good business cause and not for bad intentions because so many SMEs have lost property worth thousands of Kwacha in this fashion because of failure to pay back the loan.
A business loan may be obtained from the bank either to finance a new business or rather to boost the already existing one.
Financing a new business using a business loan is even trickier because this calls for thorough research and ensure that the business plan works according to the projections.
However, it is important for entrepreneurs to know that any business founded on risks and that those risks must be calculated ones.
Otherwise, the best time recommended for getting a loan in a business is that time of boosting the already existing business especially for expansion purposes.
I say so because the already existing business would give an insight to a business performance over the past periods and the business trend would give the pattern of income that has been coming into a business.
Depending on the steady flow of the business income, such a business can make steady income flow projections of how it can pay back the loan.
However, this calls for financial discipline on the part of the entrepreneur.
The trend of getting a business loan among the entrepreneurs is that they go on to make untrue financial statements to present to banks and getting loans on the pretext of false information.
This presents a lot of problems to the banks when these loans become toxic as the banks are involved in legal battles when recovering these loans through collateral.
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