Tag Archives: loans

Is Your Business Loan for Expansion or Consumption?

The biggest concern with most budding entrepreneurs, is the availability of start up capital. A wide array of organizations, are availing funds to small business. Business loans  however, are becoming more difficult to secure. Many determined entrepreneurs have managed to scrape the necessary funds together, and build their businesses without any outside loans or funding. They however, are in the minority. Other small businesses, on the other hand, still failed despite the injection of loans into their businesses.

Many businesses, successfully securing loans have squandered their loans on irrelevant luxury items and assets not useful to the business. Lending institutions are continuously tightening the lending criteria, to avoid problems of this nature.

This article will not focus on loans failure statistics or debate whether a business loan is indeed necessary. Here I will attempt to address the proper utilization of a business loan for the growth of the business.

Funding of a business can come in various forms, i.e. loans from government, loans from a bank, second mortgage over property, equity/venture capital, loans from family or savings or investments.

When business owners calculate their requirements, they invariably add in their inventory and overhead costs to their capital requirements, such as machinery and equipment, and arrive at a total loan requirement, comprising capital and working capital requirements.

If more than 40 percent of the loan requirement is for working capital, the loan would basically fund consumption and not expansion of the business. A build-in working capital requirement in a loan is understandable. But a high working capital component reveals nervousness, on the part of the business owner, in dealing with future uncertainties. Business is all about risk, so a loan cannot cover dangers that the business will inevitably face!

Working capital and day-to-day expenses should preferably be funded from current revenues, not loans. This is a contributing factor to loans being rejected. Since lenders are averse to funding operational costs, from loans. In the same way as loans and credits cards are dangerous to funding living expenses, so are loans used for the operational costs of a business.

Apart from the danger of utilizing loans for consumption, there is a basic reason why lenders prefer to finance capital equipment, as opposed to overheads. The reason is quite simply, SECURITY! A business that goes belly-up, can either return financed assets, or the lender can attach these assets to defray any costs incurred, by the lender. No recourse is available to the lender, if the bulk of the loan was applied to overheads.

When writing a business plan, for a loan, the business owner should clearly list assets required, its value, and importantly the projected return on that investment. The focus of the loan requirement should always be on capital needs. Many institutions will gladly provided a 10 percent working capital component inthe total loan, if the business plan is convincing. Another advantage would be the “own contribution”, by the entrepreneur. The higher the own contribution, the better the prospects of securing the loan.

It is advisable that any business owner should engage the support of financial consultants and accountants, not only prior to the loan application, but after securing the loan as well. A frugal plan, and budget should be drawn up to guide the business, as well as monitor the utilization of the loan. The budgets should also be split between normal income and expenses, and capital budgets. This will ensure that the business derives maximum benefit from the loan, boost revenues, so as to ensure that the loan commitment is settled speedily, hopefully before expiry date.

 

 

Contact the Author
Sean Goss
 
sgafc@mweb.co.za

A Practical Debt Repayment Plan

The recession has pushed even the most financially responsible persons amongst us, into a debt crisis. The interest on arrear/late payments exacerbates the situation even further. The pile of bills is increasing, and it just seems that there is no way out. Or is there?

 

Debt management to each household or business is unique. No matter how appealing any debt management program sounds, it will only work if discipline and dedication is applied.

 

Here I offer a guideline tried by a few clients whom claimed that it not only worked but also became fun after a while.

 

For the Household

 

  • Collate all bills in a folder, and don’t discard any invoice, statement or letter of demand.
  • Take the balances from every single statement, and list it.
  • Transfer the balances on to a spreadsheet, starting with the most important, to the least important. (Mortgage, Vehicle repayments, electricity, groceries, etc)
  • Split the due amount between long-term and short-term portion.
  • Obtain totals. Don’t panic, even if totals reveal that you heavily indebted, this is a start.
  • Refine the spreadsheet, by listing the next 12 months.
  • Scrutinize the list and determine if there are any expenses/debt that can be considered unnecessary, such as cable TV, clothing accounts etc.
  • Under the monthly columns, start listing the priority payments, such as mortgage, vehicle repayment etc.
  • Target the short-term debts for elimination. Entertainment and food expenses should be slashed to cover one or two small debts.
  • If the totals reveal that payments are way above income, start playing around with the expense figures, by reducing each debt proportionally until it can be match your monthly income. Have one small debt that can be expunged completely.
  • Notice how extra cash is freed up after one month, to pay debts in the following months.
  • Follow through by looking at the complete picture on the spreadsheet.
  • Proceed to call your creditors, informing them that you will pay less in a certain month on a bill, and catch up in the following.
  • There are two important factors to bear in mind; PAY 80 to 90% of Priority Bills, and SETTLE, SMALL Bills. The amounts in-between can be stalled or deferred.
  • As you pay amounts on the spreadsheet, mark the items, and congratulate yourself.
  • After three months, you should notice an improvement, in your cash flow.

If it works, start paying extra on your debt.

 

 

 

 

For the business

 

The business owner has even more room to play with, than a normal salaried worker.

  • The business should be in a position to extract an age analysis listing of all debts for a certain period.
  • All the data can be transferred to a spreadsheet and the long-term component can be added.
  • Due to economic conditions debtors are settling late, so different repayment terms should be negotiated with creditors.
  • The first priority for any business is salaries, followed by rent, telephone, transportation etc.
  • Split total dues over a four-week period, starting with salaries/wages.
  • Determine if there are any arrears on debt and its long-term component.
  • Create week ending payment targets, i.e. Salaries, per week, or month end date, followed by the 7th, 15th, 25th of each month.
  • Categorize your debts in the same sequence as above, as per priority.
  • Lets use an example of monthly debt/overhead of say R50 000, might seem compelling, but divided by four weeks (R12 500) it starts to appear more manageable. Remember, you used to pay R50 000, once of at a certain period, say the 30th, your attempts to remain loyal to your own creditors by trying to pay the same amount as before got you in this mess, but now we spreading this debt over four weeks to accommodate your customers.
  • Your own loyal, struggling customers will pay you late (recession), so we factor their late payments into our own repayment plan, as opposed to rushing to settle all creditors.
  • If it appears that you might not hit the weekly target, find alternative means of raising the cash, but stick to your repayment plan. This is vital, if you are going to make the repayment plan work.
  • If you make every payment target, consider paying extra on your debt.

 

 

We assume that we need more cash to survive. We can work with the little we generate, even in situations where we lost income this repayment plan can work.

 

Seek creditors cooperation as far as possible, since their understanding is crucial to the success of any repayment plan. What gets people deeper into debt is panic and disdain for their creditors. They avoid creditors for months on end, and when action is taken, they have to raise vast sums, to settle one creditor, leaving them in a precarious position, with regard to their other debts.

 

Readers are however, advised to seek additional debt counseling if they in serious debt.

 

Author: Sean Goss  sgafc@mweb.co.za