Have you ever found yourself walking without knowing where you are going? Many people associate that with a mental health challenge and some will even go ahead and refer to others doing this as madmen who keep walking without direction and purpose. According to Thomas Carlyle a Scottish historian, “The person without a purpose is like a ship without a rudder.”, this shows how important purpose is in our daily activities.
A few years ago, a colleague and friend came to my desk with a big smile and broke the news, “I have finally been confirmed into employment and I can now take a loan!”. First, I congratulated him then asked him, what the loan was for, and he couldn’t answer that question. All the while, I could read his facials not knowing what to say. This is what happens to many borrowers every day – borrowing on the account that money is available without a clear purpose on what to do with it.
Let’s break it down to what happens when one borrows without a purpose. The sequence below is what typically happens:
- After funding you start figuring out what to do.
- Before you realize it the first installment is due.
- You use the loan proceeds to settle the first installment.
Assuming you are lucky enough to have identified what to do with the loan proceeds by that time, then it means that by the time the second installment is falling due, you are yet to start getting the return on investment. This means one thing – that the second installment will be drawn from the loan proceeds again. In between the loan drawdown date and the date the full investment is done, there is a high possibility that some of the loan proceeds will be used to meet personal expenses
The net effect to this is that what will be invested in the business will be at most sixty percent of the loan proceeds while it is expected that you will repay one hundred percent plus interest and charges. At this point the business starts to struggle to raise a higher installment than what was invested, the return on investment is far much lower than the expected repayment, and if there is no clear bailout plan the business closes down and the owner starts the gospel of how ‘loans are bad’. It is NOT that loans are bad, what is bad is that someone started a journey without knowing where they were headed, and the purpose and the direction was missing from the word go.
The solution to this problem is very easy – having a clear loan purpose before going for that loan application. William Clement Stone, an American author of the book, “Success Through a Positive Mental Attitude” once said that the Definiteness of purpose is the starting point of all achievement. The most sought-after types of financing are working capital financing, asset financing loans, and check-off loans. Let’s look at how the purpose dilemma can be addressed in each of them.
- Working capital financing – In this type of financing, entrepreneurs mostly borrow to boost their daily business operations such as adding stock, to meet increased demand, meet an urgent order, and capturing a new market niche. It’s very important to write down a plan on the expected expenses and how they will be financed. It is also not advisable to have your projects a hundred percent debt-financed unless it’s the only option. After writing down the expenses and how they are going to be financed you will have a very clear line on the external financing need and immediately the funds are disbursed they will go to their rightful use.
- Asset finance loans – this type of financing helps investors acquire assets such as vehicles for business and personal use as well as other business machinery. It’s very important to prepare early with the estimated cost of the targeted asset by having either a quotation, proforma invoice, or even a sales agreement. In this type of financing the borrower raises a certain percent of the cost while the rest is settled by the financier, it’s very important to be clear of this information before loan application.
- The checkoff loan – in this type of loan, financing is against the borrower’s salary and it’s the easiest form of financing one can get. There are no bank statements, no collateral as long as the one-third rule is met and the employer is willing to submit the payroll deductions to the financier every month. This makes the product buyers get exposed to easy financing and an increased lack of purpose in this category. The advice on this one is that one should avoid unnecessary financing since the repayment is normally long-term and can be draining. Some people have retired still repaying loans for which they are still unable to account for what they did with them, thus living a very poor life post-retirement.
The purpose dilemma in the bigger picture is affecting even the nation at large. In the recent past, there has been an uproar from Kenyans against the country getting further external financing. Citizens are Taking a close look at the protest, it’s clear that the issue Citizen’s are protesting isn’t so much about the funding as it is about how the funds are used. Borrowing to settle a previous debt is an issue that should be avoided at personal, business, and even at the national level, since the result is paying double interest on the two facilities.
In conclusion, having a purpose when borrowing is one of the most important aspects one should evaluate when seeking a loan facility for personal or commercial borrowing. At Springboard Capital Ltd, we not only offer you financing but walk you through the purpose advisory to ensure that your investment pays. “You’ve got to have a purpose no matter what you do in life.” – Arnold Schwarzenegger
Article by: Kareithi Wainaina, Credit Manager at Springboard Capital Ltd.
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