So you've got this amazing business idea and you've thought about it over and over again and you're very positive it would boom. But you just don't have enough capital, and you're considering taking a loan.
Or there's this house by the beach that has an awesome view. Your dream house; your wife and kids are so going to love it, but you can't afford it just yet.
The house agent says you'd never get it cheaper than this. "This is a lifetime opportunity" he chips in. So you're considering taking a loan. You have a steady job afterall and you can pay off the debt before the end of the year, but, what if you lose your job?
People take loans everyday for various reasons. Some people take loans to start a business, some to acquire a property, some for health reasons, some even take a loan to pay off interest on another loan!
But this comes along with its own burdens because sometimes even with the best plans and good intentions, things may not really work out fine.
This causes strain on good relationships, or a bad name for the borrower when he can't pay back and a multitude of worries and anxiety.
It is reasonable then to conclude that since taking loans causes friction, it should be viewed as a last resort and not an easy alternative to solving money problems.
For example, instead of borrowing a huge capital; how about, building your business from the scratch with the little capital you have and expanding it as time goes on?
Surely, that would be very fulfilling.
There is no fixed interest rate on loans. It is based on the agreement and terms between the debtor and the creditor. Though a 10% interest rate is more common, some people think of loan as just borrowing money when they do not have available capital. Some stake their assets as collateral without proper reasoning or analysis and this has led to a lot of courtroom settlements.
Loans should abide by some strict agreements between the parties involved. Although this strictness comes in different levels. For example, the strictness involved in a loan agreement of when one loans out a certain amount to his family member, will certain differ from one loaning out to a business fellow, or a firm loaning out to a different firm.
Some loans come as financial assistance and thus do not have any attached interest. Giving out loans with interest is legally supported and thus it is best to back the loan term agreements legally is best advised. That is, involving a legal third party (a lawyer) is advised regardless of the level of strictness of the loan agreements.
Some people tend to go by a religious third party instead and this has lead to complicated issues when the borrower does not pay back and then the lenders now seeks legal involvement.
Before taking a loan, you should have a planned out means to achieving a profitable end, that is, you should have made some profit from the loan after paying the loan and all agreed interest. Having a good business plan aids a lot in getting loans granted.
Some firms who grant loans tend to be more interested in your business plan than in your collateral. Even some government sponsored projects would seek just your business plan when you seek a loan.
Is Taking A Loan Financially Advisable?
- Be sure that you an easily make the payments. Do not be too hasty to sign on the dotted lines to loans with high interest rates which you cannot obviously afford.
Having a realistic payback budget keeps you on a safe side when requesting a loan instead of making yourself believe that you could maneuver in some way later in the future and pay back. - When you need an essential asset and you lack the funds to purchase it or maybe purchasing it would render you broke, it is better to take a loan and buy it where by you can pay installmentally with the attached interest. Be sure that the assest is essential, for example, if you have to drive to work everyday, you should have a functioning vehicle, taking a mortgage loan here is okay.
- When your investment returns are greater than your interest rate, taking a loan is best. Some people only think of reinvesting their profits, but expansion, especially when there is a good market demand of your services or goods is best achieved using a loan. Lets say your investment returns per month is 5% and your interest rate per month is 2%, while not take a loan and grab the 3% as extra profit.
- Taking a loan when you know that you can pay it off early is okay. For example you have an urgent purchase to make but do not have the money to do so at the moment, but you are certain to get the money to pack in due time, its okay to take a loan. This types of loan are usually short-term and are often taken by salary earners who are sure of a specific amount being credited into their accounts every month end.
- It is advisable to take a special loan when you have a well laid down business plan to assuring you of some investment returns. Special loans which are granted by many govt powered programs come with very little or no interest. It aim is mainly to increase the country's entrepreneurship level and reduce poverty ratios and not for profitable reasons, thus do not attach harsh interest rates.
Taking these kind of loans very much advisable, where by you save the supposed interest as more capital once the loan has been withdrawn.
Even though loans might be financially frowned at, some cases just require them to make a larger profit. It offers its own risk just as every other business does. Before thinking of taking a loan be certain of its necessity and its profitable returns.
The decision to take a loan should never be made hastily. Hence, after weighing the pro's and con's, getting a plan B for backup wouldn't be out of place.
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You've said the best thing in the post earliar . instead of going for loan, why not build little business. What is the assurance that the huge money you lend can yield
yep. It's safer that way
@opeyemioguns it all depend on how good the business idea/plan is and dedication to the business....Life it self is a risk no 1 knows what will happen next and every entrepreneur you see today take risk...i would say taking a loan is not a bad idea if the business plan is good.
Intelligent Post! Oh, Ofcourse @sussan wrote it. What do I expect?
Nice post. Loan is a very sensitive subject. Whether you agree or not.... Loan is equally a debt. There are bad debts and good debts.
There are smart ways of taking loan... And I actually wont advise new businesses to take loans. People who take loans to start new businesses, most times have an existing successful business.... Or ever worth more than the loan they are taking. What they are just doing is making more money using other people money.
You have a great business plan isn't enough reason to take a plan.
No investment is risky.... Only the investor is.
What you're taking the loan for, is it an asset or a liability.
Financial literacy is of great gain.
Building a business from scratch with whatever capital and your disposal not only builds your experience, it builds your reputation and also gives you peace.
To start up your business, there are other means of getting other people money aside loan. Find investors.... Friends and associates. If I need to invest 1m in my business, then It must mean I have about 10 friends that can trust me with their 100k. Or 100 friends that can trust me with their 10k.
Am not against loan.... But you need to be wise about it.
I dont really support the idea of taking loan either
Buy the piece is really a great eye opener.... Kudos to your matchless inspiration and thanks
i go with starting with a little capital which you own... Loans are just liabilitieses
i go with starting with a little capital which you own... Loans are just liabilities
you don't have to wait until you have a huge capital before you start a business but you can start with something small and make it bigger in the subsequent years after.
That's a great deal of information there, I'll have to think about it carefully whenever i feel like taking a loan
This is frankly an excellent post, with practical tips on why loans should be taken or avoided. As a banker and credit analyst myself, I always advise clients to always ensure that they have genuine needs and viable investment plan before picking up a loan facility.
The bulk of loan overdue we are currently facing in our bank results from clients who took loans and diverted the funds.
If some of those clients have had the opportunity of getting sound financial advice as the one you have put up here, perhaps they will not be in the mess they are in today.
Very true
Thanks
Thanks alot for this topic @stach... It came in handy
I have been pondering about an issue a friend brought to me concerning loan. Though it's about acquiring a landed property from his place of work.
The property is worth 4m naira and it will continuously be deducted from his salary till it's completed.
I just need to know if there are dangers in cases like this
Always read in between the line to know where there's a catch. Involve a lawyer if you can
Alright dear, tnx alot
If its a loan for business, in order to gauge your repayment capacity, first do a cash flow projection based on very realistic assumptions without any wishful thinking and fantasies.
@stach @sussan i like your write up and the financial advise you gave 👏 bravo!
The truth is loan can be a good debt or a bad debt....it all depend on the individual business plan and how to pay back...most individuals create bad plans which make it difficult for them to achieve while some posses good plans which is easily achievable.
I would say when one is taking a loan..he or she should think of the pay back duration (time of payment) and his source of paying back incase plan A doesn't work...they should always be plan B....this is why must debt or loan turn into a bad one. Thank you for creating this post.
I would like to know if their is a platform where one can get loan (up to 50,000naira) here on steemit...I have a good business idea/plan but having financial challenge. Thank you.
Non that I know of
Alriight...thank you