Monday, December 5, 2022

Muchemi: Is borrowing from bank to fund your business a good move?

 

Is borrowing from bank to fund your business a good thing? What should you be cautious about when you decide to take this route? These are the questions Samchi Group chief executive officer, entrepreneur Esther Muchemi examined in her platform:

You remember we talked about banks/your banker earlier on?

Let us continue.

Is borrowing from banks to fund your business a good thing?

The truth of the matter is this, if my banker and my banks, never believed and supported us, we would not be where we are today, and honestly, I have an amazing relationship with my banks.

I treasure their support and I know they value me as a customer as well.

But this didn’t happen over night. There was a time I struggled with this, but over time, we have built our creditworthiness to a respectable level.

So why borrow?

1) It allows you to accelerate your ability to expand and scale up your business and also to build wealth.

Let’s put this in perspective. How many people, genuinely, can afford to have 1B in the bank at a go? I can tell you not many. But given time, you can accumulate this over many years. That’s why you need the bank today; to buy, to build, to grow and to repay over time, okay?

Esther Muchemi: How to choose the bank that will help you grow your wealth

2) If well used, the borrowed money can help you make profits which otherwise you would not do.

3) It can help you cover overheads as you push your business to higher levels.

4) A good credit rating is a good thing for your business as long as you understand and can manage your business well.

5) If you don’t want to surrender ownership by having equity shareholders and partners, this is a good way to go.

6) It helps create the discipline to work hard.

When you remember you have a loan to pay, you push yourself further.

9) The business leaders become more responsible when their pressure is from third parties(banks) than when they are using the investors’ money.

10) When the money is borrowed, it comes with a cost.

It therefore allows you to get the real cost of the business.

11) It gives you a tax advantage. The interest charge is an allowable expense for tax purposes.

Have you ever heard the statement that says the poor save in banks and the rich borrow those funds?

Think about it, so, so true!

The caution however is;

1) Never borrow to finance lifestyle, never!

2. Learn to match borrowings to their purpose, if for land for example, ask how you will pay for a land that is not generating revenue. If cashflows can’t allow you, just let it go.

3. Long term borrowing should be for long term assets and vice versa, this is important!

Personally, I go further,

4) The assets bought must be security by themselves.

You can’t afford to expose yourself entirely to this risk. Keep risk controlled to the relevant asset or line of business.

The bottom line is this, there are good reasons for borrowing from banks.

If I knew what I know today, I would have done it earlier, however add caution is key. Note: I say caution not fear!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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