We know that access to credit is an important factor in growing your business. That’s why we have created a partnerships with several financial institutions. Based on your engagement with Oze (how long and consistently you use the app) and your business performance, you could be eligible for a no-collateral loan.
When you think about getting a loan for your business, how do you feel? Excited? Scared? Hopeful? Worried? This is all normal, but if you understand your loan fully, you can turn all of these emotions into one…confident!
First, you need to ask yourself, “Why do I want a loan?” Loans can be used for several different things. Some loans are short-term and used to meet payroll or buy some inventory. Others are for longer-term capital investments, like machinery. The best use for a loan is for something that will permanently increase sales, decrease costs, and improve your profit margins.
One of the most important things to know is how much debt you can safely take on. The term for this is the debt-service-coverage ratio (DSCR). This is a relationship between how much income your business makes and how much you can borrow. It’s pretty intuitive. If you have GHS 10000 in profits, it should be easy to pay back GHS 1000, but if you have GHS 1000 in profits paying back GHS 10,000 seems impossible. You calculate DSCR by dividing your net income by your current and planned debt. It should not drop below 1.25. Maintaining your DSCR above 1.25 means that your business has enough income to pay its debts, and there is extra “cushion” in case there are disturbances to your business’ cash flow.
Let’s do an example. If you sold GHS 2000 and had GHS 1000 of expenses you have a net income of GHS 1000. You already owe a supplier 200 cedis. (2000-1000)/(200+[new loan principle + interest]) must be greater than or equal to 1.25, so your debt cannot surpass 800 cedis. Since you already owe 200 cedis, that means you can safely borrow up to 600 cedis, including interest.
Once you know why you want to borrow, how much you need, and how much you can borrow, it’s time to understand the terms. There are 3 major terms to understand. “Principal” is how much you are borrowing. Interest is the price you are paying to borrow the principal. Duration is how long you have to pay back the loan.
In Ghana, most interest rates are given monthly. That means that if you get a 10% monthly interest rate on a GHS 1000 loan, each month you have the loan you will owe GHS 100 in interest.
You also need to understand if the interest is calculated “flat” or on a “declining balance”. The bank prefers flat. This means that no matter how much of your GHS 1000 loan you have paid back, you still owe GHS 100 monthly. If interest payments are calculated on the principal amount, your interest will likely be flat. Declining balance interest is calculated periodically based on how much principal is left to pay. For example, if you have already paid GHS 400, your interest payment would be based on the GHS 600 you have left to pay. In that month, you would only owe GHS 60 in interest instead of the GHS 100 you would pay monthly under flat interest. (337)
Duration is a balancing act between how long you have to pay and how much interest you want to pay. Your first choice may be to give yourself as long as possible to pay back, but this can be very expensive. (206)
Let’s go back to our GHS 1000 loan paid with 10% interest monthly. If you pay back in 3 months, you will owe GHS 300 in total interest. If you take a year to pay back, you will owe GHS 1200 in total interest. In other words, you will pay more in interest than you have taken out in principal. Always calculate your total interest!
You also need to be realistic. If you are taking a loan to plant yams, you will likely need 4 months to pay back and so can take a short-term loan. If you are growing pineapples, it can take 2 years between planting and harvest. A 4-month loan is not feasible. You can always repay early, but if you are late you can incur penalties.
Interest may not be the only fee associated with taking a loan. Some lenders will charge you an application fee, a processing fee, or transfer fees. If you need to bring money to the bank to pay back the loan, factor in the transportation costs. It’s important to understand the total cost of borrowing before accepting any money.
You also need to know how the loan is secured. No-collateral loans, like those you can get through Oze, are unsecured. The trade-off is that interest is higher. The most common way to secure a loan is with landed property, but you can also secure loans with invoices, inventory, or other assets.
Life does not always go as planned. Maybe your yams got a virus and so, the yield was half of what you expected. Don’t hide in shame! Be honest and pro-active with your banker. They will be much more understanding if you tell them that you will have trouble paying than if you change your number and try to hide.
Sometimes the things that are unplanned have nothing to do with your business. You may get sick and have hospital fees or your roof might need repairing. You may be tempted to use your business loans to cover these personal expenses. Don’t do it! Spending your business loan on personal expenses will get you trapped in a cycle of debt, whereas if you use your loan to grow your business, you will be able to build up savings for emergencies. Don’t think of your business’ money as your money. It doesn’t belong to you in the same way you cannot spend your neighbor’s money.
If you think that you understand all of that, take the Credit Ready Quiz to test your knowledge.