MUCH ADO ABOUT HIGH INTEREST RATES
Money is the lifeline of any business, so whether you’re starting a business or running an existing one, securing financing is a major factor. In many countries getting a business loan from a Bank is a piece of cake but Nigerian Entrepreneurs are discouraged by the cumbersome process and high interest rates of local banks.
In continuation of our series on Doing Business in Nigeria we now reproduce an article written by Oguche Agudah and published in Business Day Newspaper of 30th November 2015. The article encourages Nigerian Entrepreneurs to make the best of what is available by taking commercial loans when they absolutely need it, and also highlights the need to sweat the loans for maximum value.
“I meet a number of entrepreneurs and businesses that complain about high interest rates, from commercial and microfinance banks. Their argument and frustrations are real. They can’t imagine borrowing at interest rates between 20 to 30 percent and still turn a decent profit whilst I buy their argument, I think the focus on the rate of the interest has paralyzed a number of entrepreneurs such that they lose the potential up lift that taking an external loan would have on their business.
Do I really require the loan? This is a pertinent question that needs to be addressed by entrepreneurs. They need to look at their current and future needs and determine if the proposed loan they are about to embark on is really required for the survival of the firm. If it’s not, then there is no point taking a loan in a high interest environment. However if they have looked at all funding options and realized they need to get external capital in order to survive, then they need to start thinking how to maximize even with the high interest rate.
Areas to consider include: the business must calculate how much it will earn from taking this loan. As an example, if the loan is priced at 30 percent per annum, but the business is going to earn 40 percent per annum from its business activities, then this is fine.
The business also needs to see if it can negotiate payment terms and tenor increases with the bank. For instance, if the company is able to negotiate a two year loan, with a decent moratorium (agreement to begin repayment on principal on loan after a later date), then this would do a lot to the fortunes of the business.
The company can also negotiate on repayment terms. They should use terms that match their cash flows. As an example, if the bulk of their cash inflows occur in a particular month or season, they can ask for the loan to be structured in a way that matches their cash flow.
How can I reduce my costs internally? So, now that the company has decided that it requires the external funding for the business growth, it needs to see how it can accommodate the expensive loan, by streamlining some parts of its operations. It needs to look internally to find out areas of waste within the firm and also areas where it can reduce cost without stopping the operations of the company. This way they will be able to utilize the loan better.
Whilst it’s in the best interest of all concerned that interest rates trend down-wards, entrepreneurs must realize that they must make the best of what is available. They must only take commercial loans when they absolutely need it, and when they do, they need to sweat the loans such that they see it as an opportunity to reduce cost in their business.
What business also need to realize that is that it is actually better to take a loan at a higher interest for a longer period (3-5 years) than to take a lower priced loan for a short period (6 month). It is also better to be able to access a higher priced loan when you really need it to take advantage of business opportunities than to wait for a lower (single digit) loan that takes months to be approved and comes with countless documentation.
