Much ado about high Interest rates

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 and 30 percent and still turn a decent profit. Whist I buy their argument, I think the focus on the rate of interest has paralysed a number of entrepreneurs such that they lose the potential uplift that taking an external loan would have on their business.

Rather than focus on the rate of interest, I believe entrepreneurs should focus on a number of issues in relation to accessing loans from banks.

1.  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 realised that they need to get external capital in order to survive, then they need to start thinking about how to maximise the loan even with the high interest rate. Areas to consider include:

a)  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.

b) The businesses also need 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 do a lot to the fortunes of the business.

c)   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.

2.  How can I reduce my costs internally?

So, now that the company has decided that it requires the external funding for 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 would be able to utilise the loan better.

Whilst it’s in the best interest of all concerned that interest rates trend downwards, entrepreneurs must realise 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 costs in their business.

What businesses also need to realise that is that it is actually better to take a loan at a higher interest rate for a longer period (3-5 years) than to take a lower priced loan for a short period (6 months). 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.

The bottom-line is that if your business needs it, if you can earn a profit from the loan, and you are able to reduce costs in your business to accommodate the loan, then go for it, and quit complaining.

OGUCHE AGUDAH