“Capital can do nothing without brains to direct it” – J. Ogden Armour.
The primary duty of every entrepreneur is to continuously raise capital for his business. Many entrepreneurs borrow money or take a loan blindly and in the end, they bite their fingers in regret.
This write up will explain to you basic facts you need to know when taking a loan. In the process of borrowing money, or better still, taking a loan:
1) You must know the terms of Repayment:
Some times, when small business owners borrow money, they have no choice in choosing the repayment term. When taking a loan, you have to be sure of the terms of repayment. Example of a good question you should ask is:
Am i going to repay on installment or not? When you know the terms of repayment, you can strategize on how to utilize the loan you are taking.
2) You must know the Interest rate:
This is a simple but yet the most confusing subject for entrepreneurs. When borrowing money for your business, you must demand to know the interest rate or better still, get an accountant to trash the issue of compounding out. Many entrepreneurs ignorantly fall into the compound interest trap without knowing it and in the end; their entire profit is used in repaying the loan. So my best advice is, get an accountant. PERIOD.
3) You must know the loan maturity date:
Knowing the loan maturity date will help you plan how the funds will be spent. If it is a long term loan, you can use it to solve long term business needs and vice versa. The major mistake most entrepreneurs make is using short term loans to solve long term needs. This act makes them fall into the credit crunch. Be wise, know your maturity date and plan appropriately.
4) You must know the cost of taking the loan:
When borrowing money for your business, you must know the cost of taking the loan. Some financial institutions require you leave a fixed deposit with term, some might charge transaction and legal fees. By knowing the cost of the loan taken, you can tighten up your financial statement.
5) You must present endorsers:
This is a simple rule in the game of borrowing money. You must present an endorser or show your credit history. This is just to show you are credit worthy.
6) You must know the true value of the collateral you are to provide:
This is a very important rule you must not joke with when taking a bank loan. To me, it is mere stupidity to put down a one million dollar commercial building for a loan of $300,000. So before putting down a collateral, make sure you appraise it and know its actual value.
7) You must have total control over the direction and utilization of the funds:
This is a vital factor that can never be over emphasized. Control is the most important word in the world of business and investing. Some banks lend money to entrepreneurs and still try to control the affairs of the entrepreneur’s business. Some lend money to investors and still dictate to the investors the type of company stock they should buy. So be careful, control should be your watch word. It is your birth right, don’t sell it.