By Fola Daniel Adelesi
In trying to raise business capital, entrepreneurs often consider a business loan as a viable option. A business loan can be great idea and at the same time, a big mistake. Just as loans build businesses, they also destroy them in equal measure.
Entrepreneurs are often advised to keep their business expectations low or conservative. This advice is most relevant when asking for a loan to start a business. If you get your figures too high, you may be creating a false hope that places much more value on your idea.
The excitement that comes with securing a credit facility is usually very high and being rejected can be discouraging. For that reason, many entrepreneurs are doing as much as they can to make sure their loan applications and other sources of funding are successful. Many financial institutions understand this mismatch and often advise entrepreneurs to begin implementation of the business plan idea before seeking a loan. In other cases, you may be advised to raise money from family, friends or other business associates, and only consider the bank as a last resort.
Before you take a loan, if you have finally decided to take one, you need to be clear about these things:
- The loan you really need vs. what is feasible. Be sure you know what you really need and that is what you should be asking for.
- Can your business pay back the loan? Any business that wants to take a loan should have the cash flow that enables it to pay back the loan. If the cash flow is not there, do not take the loan.
- What is the repayment plan of the loan? Don’t assume that you can pay back the loan on your own terms. Have a clear agreement on split payments and timelines.
- What other terms and conditions come with the loan? Sometimes these conditions are in ‘small print’ or in the ‘Terms and Conditions’. Please read through agreements thoroughly or get a lawyer to assist you.
- Document the agreement on the loan before taking it. It is one thing to have verbal agreements and it is another thing to have a written agreement that states when and how things will be done.
- Remember it’s a business loan. Do not get carried away. The loan is for the business and not a personal loan so it must be used strictly for business.
- Try to pay back faster than you agreed to. This always works and ensures discipline on the part of the borrower. Plus it will save you the embarrassment of being chased by creditors or forfeiting your assets used as collaterals for loans.
When to turn down a loan:
- If it is lower than what you asked for. Please turn down the loan because you will not be able to achieve your objectives.
- If it comes with some stringent conditions. Don’t focus more on the money and ignore the terms, they will be enforced in future.
- When the creditor offers far more than you need. Don’t always see this as an opportunity. Only take what you need. If they insist on giving you more, run!
Remember, a loan can grow your business but your business can also be grounded by a loan.
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