AS I moved out of a lift from Kulima Tower building situated at Lusaka’s town centre adjacent to the Anti-Corruption Commission building, I picked up a business conversation with a friend.
I advised him to be careful with business loans which he should only obtain when necessary with a focus to paying it back from the existing business resources, enough to cover such repayments.
An elderly woman who was with us in the lift and was listening to our conversation chipped in and said that what I was telling the friend was true.
She started narrating a story of a certain man who was running a school and had obtained a business loan on the pretext of improving his business.
This man had obtained a business loan and pledged collateral in form of fixed property.
However, upon successfully getting the loan from the bank, the money was diverted in buying luxury goods that he never owned previously.
He went on to buy luxury cars, expensive household properties and sometimes sponsored house parties among others.
In no time the money dwindled to the lowest levels.
When time for starting the repayment of the loan approached the man started struggling and in no time the loan became toxic.
This is the term bankers use when the loan reaches the levels of frequent defaulting by their client.
The man lost the property pledged as collateral and the business started underperforming leading to the collapse.
Today, I am prompted to look at the business loans also referred to as borrowed capital and the way it is applied in business setup.
A young man who works with one of my clients told me that a loan can either build you up or break you down into pieces; otherwise when you get a loan you cannot be on the same business level.
A business loan is obtained with a view to boosting the working capital for business operations to widen the profit margin or to buy fixed business assets to help with the efficient running of the business, maximising the business potential or both.
For these reasons when a business embarks on obtaining a business loan it should have done homework of how the business loan and the interest will be paid back over the period in question.
A starter up business must comprehensively prepare a workable business plan which among other inclusions will suggest how the borrowed capital will be paid back over the period plan.
As for the existing business it is important to look at the already existing resources and incorporate the payment plan in it to avoid defaulting.
It is not business wise to get a business loan blindly with no proper plan of how to use the business money and how to pay for it because the consequences of defaulting on a loan are too ghastly to contemplate.
I have witnessed some Small and Medium Enterprises (SMEs) who obtained a loan in form of a bank overdraft ended up losing properties worth huge sums of money just to pay off such a loan.
lending institutions will feel much comfortable and safe on a client who is always on time in fulfilling the obligation of paying back the loan together with interest and the bank will not hesitate to offer another loan at the end of the existing one if the client requests for it.
However, the bank becomes ruthless to loans that are frequently defaulted on, because they always say that they use the depositors’ money to lend out and they do everything possible to ensure that the money lent out is recovered.
SMEs should ensure that when obtaining the loan they are cautious and apply the money fully to a business venture so that the plan for obtaining such a loan is fully achieved.
A loan that is obtained and diverted to other ventures away from the intended purpose usually brings in problems, especially when time for paying back such a loan is at hand.
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