The loan has been received after numerous application for the meager loan that would soon destroy the lives of the founders. They are thinking it will be sweet experience, they just like other SMEs (startups) don’t realize that they have become prey to the most dangerous mindset that kills even the most successful business. . .
Small and medium-sized enterprises or small and medium-sized businesses are businesses whose personnel numbers fall below certain limits. According to the Central Bank of Nigeria, a SME is a company that employs from 11 to 100 people and has assets between ?5 and ?500 million. There are a lot of SMEs in Nigeria.
Yes, SMEs are cut across the entire nation. Many of this SMEs are Startups. You might ask, what is a Startup? A startup or start up is a company or project initiated by an entrepreneur to seek, effectively develop, and validate a scalable business model. Hence, the concepts of startups and entrepreneurship are similar.
A startup is a business structure powered by disruptive innovation, created to solve a problem by delivering a new product or service under conditions of extreme uncertainty.
Many entrepreneurs and renowned business magnates define startup as a culture and a mentality of building a business upon an innovative idea to solve critical pain points.
Paul Graham, the founder of Y Combinator, has further simplified the definition of the startup and associated it with growth. According to him-
A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.
As Startups and SMEs grow in their services and scale, there comes the need to boost the revenue of the SME. During this phase, it becomes a critical factor and time for SME owners, they begin to source for funding like workers in a bee hive. While this moment might not be the best time for any business, it is very important to take note as to why seeking a loan for your business at it’s early growth stage could leave you in critical conditions.
What is a Business Loan?
A business loan is a loan specifically intended for business purposes. As with all loans, it involves the creation of a debt, which will be repaid with added interest. Businesses require an adequate amount of capital to fund startup expenses or pay for expansions. As such, companies take out business loans to gain the financial assistance they need. A business loan is debt that the company is obligated to repay according to the loan’s terms and conditions.
Fun Fact: Trader Moni is an Empowerment Scheme of the Federal Government created specifically for petty traders and artisans across Nigeria.
How does a Business Loan Work?
Business loans are offered by lenders. And in exchange for the money, they’ll charge interest on top of the loan amount?—?in the most basic loan structure, interest is charged as a percentage of the loan’s principal. … While business loans work with this basic structure, they do vary by the type of business loan they are.
Small-business owners often need financial help to turn their entrepreneurial dreams into reality or keep an existing company afloat. If you need cash to purchase business equipment, fund your marketing campaign or cover your payroll, it may be necessary to take out a small-business loan. A small-business loan is different from other types of loans, and it’s beneficial to understand how the loans work before you apply for one.
Why You Should Avoid Business Loans!
They say a difference between a good loan and a bad loan can go a long way in defining the outcomes of business. Here are top reasons not to embark on this route that has even taken the heads of big companies.
- The Rush to Payback Fast: Many business owners want to pay back their loans as quickly as possible in an effort to become debt free. Again, it’s important to reduce debt, but doing so too quickly can cost your business. That’s because you may leave yourself short of cash. Or the extra money you’re devoting to debt reduction might be better spent on profitable growth projects.
- It Put You on Impulse: Perhaps there is a new technology or machinery you think would benefit your business, or maybe you want to remodel or upgrade your facilities. While all of these things may prove advantageous to your business, you won’t be able to reap the rewards if you have leveraged all of your assets and the extra profits you make go toward repaying the loan. If the idea doesn’t bring in extra revenue, you are still responsible for paying back the loan. If you used assets to secure the loan, you may end up without a business at all.
- There is Always Interest: Interest, in finance and economics, is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum, at a particular rate. It is distinct from a fee which the borrower may pay the lender or some third party. As it goes, you as the SME owner will foot the interest. As you know, interest will always go up and its not constant, so the vibe of if i don’t pay this month I’ll pay later, will lead to your business accumulating a very nice junk of debt which if left unchecked will put you in the rubble.
- Your Lines of Credit are Maxed Out: If you have exhausted all other available credit, maybe taking on more debt is a bad idea. When lenders see that you are overextended, you will likely be required to secure the loan with assets. If you are having difficulty paying your existing financial obligations, you are entering risky territory by gambling with your facilities, inventory, equipment, or even worse, your own house.
- The Thought of Paying Back: Hmm, it’s no funny when the business is not giving you ROI as expected when projected and then you have debts to pay. The next thing you’ll ask yourself is if you even invested the money well or you are dreaming. Wait, wait, wait. . . Oga/Madam, you’re not dreaming! You’re owing the bank, or that agency that gave you loan oh. This is a reactive stage, and it is mixed with harsh emotions. Nigerian SMEs can tell you the stories of other business owners who allowed loan to put them in the box.
What Should the Government Do?
It’s not funny anymore that the Trader Moni scheme is a joke from glance. But then you come to think of it. What is the Trader Moni? According to the offical website of Trader Moni, TraderMoni is a loan programme of the Federal Government, created specifically for petty traders and artisans across Nigeria. It is a part of the Government Enterprise and Empowerment Programme (GEEP) scheme of the Federal Government, being executed by the Bank of Industry.
While this is just for roadside traders and petty business vendors, there is still much to be done in maxing the credit potential of the financial sector industry. The less loans given out by the Government through Commercial banks and Bank of Industry will pave way for emerging SME’s to grow admist the chaos. Let’s face it, many SMEs can’t bare to withstand the harsh times of initial setup. It’s not really funny. So where do we go from here?
There should more credit maxing systems in place to put things in scope. The need and urgent call for giving out “Grants” to business owners and SMEs cannot be under-emphasized! One major thing to denote is that Grants are free money which does not require repayment. Conversely, repayment of the loan is a must, in equal monthly payments or lump sum or on demand. Grants are non-interest bearing in nature, whereas Loans carry an interest rate, which varies from loan to loan.
How can this be made possible? How can the Government checkmate the activities to deduce the effectiveness of the grants received? Who should receive this grants? These and more will be considered in the next article.