Managing Business Loan

FOR the past two months, I outlined steps for accessing bank loans for entrepreneurs and businesses. I indicated that accessing the loans can be considered as a step-wise approach for a period of up three years, before actually attempting to seek a bank loan. After receiving the loan fund, there is another aspect of managing the funds. Unlike funds from business operations such as sales, loan funds are received in most cases in a lumpsum and for particular purposes.

Some entrepreneurs may have little ability to manage funds arising from loans and treat the funds as income realised from other sources, which may be the same as sales. In so doing, they might find that the loan funds are utilised for purposes which were not intended for. This is because when a bank loans money, they don’t require a formal report on how the business uses it.

The understanding of the bank is that the funds are utilised as per the business plan submitted to them. Another consideration is that the bank understands that the business can implement the project, manage the funds and drive the company based on their assessment and that the loan is all good. In this case, the loan meets all the criteria for a good loan.

As a business venture, it is crucial to account for what the loan funds are used for and follow internal policies and procedures. If funds are not spent on time, the bank will recoup its repayment (principal + interest) with the borrowed money still unutilised.

It is, thus, important to make all the preparations before the loan’s disbursement date to ensure that when the funds are disbursed, they are readily available to implement the activities intended for it. To avoid that, entrepreneurs must undertake the following:

  • Develop an implementation plan to outline which activities will be undertaken to utilise borrowed funds. For example, when to pay for procuring various services, machinery, contractual obligations and many others.
  • Prepare a cash flow forecast on how the funds will be utilised to match the implementation plan. Funds must be used based on the well-pre-set policies and procedures governing the business’s financial management.
  • Ensure you utilise the effective procedure for sourcing service providers and suppliers effectively. For instance, if you borrow to buy an asset, seek an expert to help you find a good deal and value for your money to purchase the support. You may consult at least three suppliers and evaluate which offers good value for your money.
  • The funds should be used only for intended purposes and strictly on the plan. However, changes are inevitable. If there is a change, ensure that the changes have been studied quite well. Remember, banks lend business loans based on the plan and possibly you have outlined various aspects and scenarios of how you will operate and earn the trust based on the business and not collateral, hence changing the plan. If there is a substantial change in the plan, e.g. change of the business, location, timing for implementation and other related aspects, the lenders must be informed.
  • Pay your share to implement the plan feasible. The bank will not finance the project you borrowed for by 100 per sent. The entrepreneur commits to pay 20 per cent to 40 per cent of the project value. Once the loan is received, the entrepreneur may fail or ignore to meet their share. Normally, when such a percentage is not paid, the same results may not be realised on time.
  • Monitor the progress of the project and cash flows to realise any delays in the project implementation and if such delays will affect the cashflows and thus, require more funding or suggest changes in the implementation plan.
  • Ensure that the business continues to maintain a good relationship with the bank. Most of the disappointment with bank loan bankers happens when a loan is advanced to a customer, withdraws occur within a few days, if not weeks and then the customer is no longer an active client of the bank.
  • Seek advice on how to implement your project. You may ask the bankers for technical advice. Banks have expertise and experience in various sectors and businesses of different sizes and forms. They know what has worked and has not worked regarding various projects and loans they have provided. The advice can also be sourced from your Management team, Board members and independent consultants.

Hopefully, these tips will help you utilise loan funds to boost your business capital.

Author: Dr Tobias Swai is a Senior Lecturer and Head of the Department of Finance at the University of Dar es Salaam, Business School. Email: Telephone: +255 75 4300 495.

Related Articles

Back to top button