Debt trap quickens the death of start ups. As a micro or small enterprise operator you really do not need to borrow start up capital.
But if you must take a loan to fund your business at all, you must be careful it does not lead to debt accumulation which can ruin the business sooner than later.
Commercial bank credit is one such debt likely to kill your business too soon and should be carefully handled right in time.
While stretching out over debt is not fun, add that to the already hectic life of an entrepreneur and you could be looking at absolute chaos.
That is why it is of the utmost importance to stay out of debt in the first place. Some entrepreneurs may claim credit facility is unavoidable. This is not true. The best way to raise start up capital is by saving up over a period of time.
However, if your savings are too meagre, you may have to look further inwards. Your capital assets may come in handy for disposal. Plough the proceeds into your business. You can always replace those assets with time.
What we are saying here is that good personal finance attitude recommends mortgaging personal assets to raise funds rather than borrowing from sources that may turn against your business operation.
Plan A preferred
Consider the experience of the Managing Director of Bright Future Enterprises, Saviour Ichie, who described banks as killers of creative ideas. Going by Ichie’s encounter with both commercial and micro finance banks (MFBs), banks have nothing to offer entrepreneurs.
Instead, commercial banks, and MFBs which are supposed to be every entrepreneur’s last hope, quicken the death of businesses.
Said Ichie: “Banks enslave small business owners. If MFBs lend you money today, as with commercial banks, the interest starts running immediately. They will not even give you the chance to start production.
“Before the money gets to you, some hiding charges which they will not disclose to you have started running. But by the time you secure the credit facility, you begin to discover that you have entered into a valley, and that it is only by the grace of God you can come out of it.
“On one occasion I eventually got N2.5 million credit from one bank. They removed N450,000 from the start as hidden charges. There are times they make deductions from your account without sending you a debit alert. The banks come up with a multitude of names of different hidden charges.
“I needed N2.5 million, and they removed N450,000 and I would still pay very high interest of 25 per cent to 30 per cent. However, I liquidated the loan in six months and applied for N5million.
“It was the N5 million loan that almost drove me out of business. I paid it by the grace of God, and after paying it the bank asked me to borrow again, but I refused. I had to borrow money from my family member to liquidate that bank credit in order to get out of the hook.
“Today, the same banks that made things difficult for me are coming to beg me to patronise them. They keep coming, begging, because they have seen the evidence of my creative idea.
“Didn’t I approach these banks for startup capital? I gave them a blueprint of my creative idea but they shunned me. If I was not determined, or died with my idea, would they be looking for me today?
“I keep saying it that burial grounds are the richest places under the sun. Many have died with their talents, perhaps because they had no resources to develop them.
“So, I maintain that it is not advisable to go to banks for money when you are starting up because the terms and conditions of giving you credit are outrageous and may quicken the collapse of your business initiative.
“Instead, dispose of some of your valuable assets and items of property to fund your business. You can always replace those assets you sold to raise funds.”
However, if the entrepreneur must borrow at all he has to consider the following strategies to avoid debt traps whether from banks or any credit providers.
Do your research properly
Before applying for a loan, consider whether you will be able to repay. If you cannot find the right loan for your business just back out.
To determine a right loan, answer the following questions: Is the loan the right loan for your purpose? Are there any hidden charges likely to ruin your operations? How will this loan affect your cash flow and budget? Does this loan require substantial collateral?
Once you do your research and find an acceptable loan you can pay back, make your budget and stick to it. Work out your repayment plan so as to not jeopardise other issues requiring your attention.
