Is it good for a small business to take a loan?

It is common to hold a grudge against the familiar economist axiom of “all things being equal”, especially in a society like Nigeria where there is a pattern of economic instability and unforeseen obstacles that can negatively affect business and lifestyle. Most business owners hope to become highly profitable, and therefore they set benchmarks toward attaining or superseding current economic giants within various industries despite the reality of unequal access and privilege.

 

Lack of Capital stands as a major challenge to businesses including those with decades of operational history who are yet to develop into medium or large-scale enterprises. To emphasize the importance of capital, Economists, from the stone age of Adams Smith (the globally acclaimed father of Economics) to those of current times, have maintained that one of the four key factors of production is “Capital”, in other words, nothing gets done without it. Interestingly, most unemployed youths have the urge to start a business and even those in gainful employment dream to quit their white or brown collar jobs to start a business of interest at some point in the future and the common denominator of that future is whenever they have capital. This begs the question if truly everyone likes and needs capital, why are we silent?

 

 

 

Before we go any further, it is important to understand the concept of capital. There is a common misconception about capital where it is assumed to be limited to your savings or the funds raised from family and friends to start or grow a business. It may surprise you to know that for every N1 equity that MTN Nigeria has, it borrows N2. This year alone, MTN has raised N200 billion loan through commercial papers and N110 billion through a seven-year bond. Such an interesting mix, the commercial papers are short term loans that mature within a year whilst bond is a long-term loan that can be deployed to capital expenditure, with the hope that the business would have generated adequate cash flow to pay back in seven years. Similarly, Dangote just closed a N50 billion bond, a follow-on to the N110 billion bond it issued last year.

 

It is obvious how large corporations take advantage of loans to grow their business. Paradoxically, small business owners neither recognise nor value the power of “debt capital” – loan! Perhaps because of our cultural or religious background, whenever we are thinking of capital, we think less of loans as a form of capital. Even when we do, we think of loans as “free loans from friends and families”, rather than casting our net wide to loans from traditional and non-conventional sources.

 

Presumably, there is a tendency to think banks are not ready to fund start-ups and small businesses, but that is only partly true and in fact, which is largely one of the old philosophies of the banks that have since changed. In today’s market, competition, policies, and in fact the market environment have taken away the cheese of banks, leading banks to change strategies towards lending to small businesses and even start-ups.

 

Though it is important to quickly note that banks are not entertaining the idea of letting go of their depositors’ funds or losing their capital. Hence, a thorough review of your business plan needs to be done, to ensure that you have a compelling business that a bank or any other lender will be interested in financing. More so, can you convince the lender that you can efficiently run the business and meet the obligations of the loan if granted to you? This is not about being a “sweet talker”, it’s about demonstrating your competence in the business. In this situation, a business partner or an employee who has a better understanding of the core of the business could handle the pitch.

 

Guess what? You don’t have to be the one to do the pitch, it can be your partner or even one of your employees, although you should understand the core of your business. Every business owner should recognize that loans are an essential form of capital and should understand what it takes to obtain a loan to take advantage and scale up to grow the business.

Listening to an ever-green interview of Adenike Ogunlesi, the founder of the famous clothing brand, “Ruff n Tumble” over the weekend, I cannot but share her perspective on loans as a form of capital, especially, her premier loan. In her words, “borrowing money actually helped me become very disciplined, it meant I needed to put systems and processes in place, and I had to submit to the authority of the business”. The lessons here are very factual, and I have read and listened to scores of such testimonies from young and old entrepreneurs. It is a fact that raising debt capital, or simply put using loan to finance and grow your business helps you to be disciplined and stretches your bandwidth to levels you never imagined. It awakens your creativity and stimulates your productivity, by infusing new energy and vista that you would otherwise not have.

Interestingly, loans can help to solve a common problem of small businesses and start-ups – a lack of systems and processes. Whilst business owners rarely like to be advised about putting systems and processes in place, sometimes because of the cost, it has been proven over and over that the benefits of institutionalising business processes far outweigh the cost. This is why loan providers insist on ensuring that borrowers establish requisite systems and processes – it does not have to be bogus, it is just something relevant to the size and nature of the business. Whilst lenders are insisting on such requirements to protect their interest and ensure you can pay back the loan, you would be the biggest beneficiary of the system because once it is established, it continues to work for you on ensuring the sustainability of your business, even after you have liquidated the loan. Submitting to the authority of the business again means being disciplined to differentiate personal finance from that of the business’ cash flow and to know that cash flow is not the same thing as profit.

 

Interestingly, an often-overlooked benefit of loan is the tax advantage. Just in case you don’t know, every interest you pay on loan, provides a tax shield to your business, and can help you save tax. So, if you are looking for a smart and efficient way to avoid tax, here you go, get a loan for your business. As you know, tax avoidance is legal and that’s one of the different ways by which the big companies manage their tax exposure.

Get a support system from the lenders:

Think about the free advice and support you get from the lenders, all in the interest of ensuring you can pay back your loan. Like a tribe in Nigeria would say, borrow money if you want to live long, because your lender will continue to pray for you till you repay the debt. This is what happens to your business, once you fund it with debt capital, you are no longer alone.

 

Getting the right loan could be your golden ticket to turn that idea into reality or scale up that business that you have been bootstrapping for the past few years. Don’t be pessimistic about this. Be sure, for every bank that turns down your loan application, there are three other banks or non-banks lenders out there that would be glad to finance your idea or fund your growth and expansion plans for your small business. More so, for every NO that a potential lender says to you, there must be a lesson learnt and always ensure to put the lesson to use in improving your chances of getting a YES response at the next trial. Also, the fact that bank A says NO last year does not mean you can’t get a YES response now. This is where your tenacity counts and must come to bear in proving that you won’t give up, rather you will continue to dare until the business grows big enough to challenge Dangote or perhaps other global peers.

 

A bonus point to note; having options helps you to always make the best decision. For instance, whilst your current bank may have limited the size of the loan you can access, you may be able to get a better deal and perhaps bigger pie from another bank, thus ensuring you are able to grow and scale up faster. Be sure nairaCompare will be there with you for the long haul, bringing you different debt capital offers and opportunities to best suits your small business needs.

 

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