You probably have been thinking of taking a business loan due to financial crisis or you probably think your capital layout is small. Here are 5 reasons why u shouldn't embark on that loan journey.
1.State of the business environment:- The business environment has a great impact on your business. It affects your business directly or indirectly, positively or negatively and your business have no option than to adapt to it if it must succeed. You have to look into the opportunities and threat in your environment(SWOT Analysis) e.g economic (inflation, increase in the interest rate by CBN to 18%), political(government regulations), socialcultural, whether or not they are favourable for you to take a loan?. Inflation leads to high cost of production which reduces revenue and can as well affect your cash inflow forecast.There is a probability that the outcome of your returns might deviate from expected due to economic factors, social factors, political factors, etc. All these are threat to the loan journey you are about to embark on.
2. Purpose of the loan
Are you collecting the loan to start up your business without any capital at hand or other sources of income? Or Do you have experience about the business you're venturing into? Or you just heard about it and decided to try it out? Then you shouldn't take the loan. Experience is said to be the best teacher. You need knowledge as well as experience about the business before taking a business loan.
3. Liquidation
A limited liability company that runs its activities through debt financing is said to lack continuity in the nearest foreseeable future. Debt financing increases the liability of a business i.e its debt obligations e.g debentures and reduces it equity. In the event whereby a company is unable to meet with its debt obligation there might be a need for the company's asset to be liquidated to payback the loan. For a sole proprietorship or partnership business,the business is likely to go bankruptcy if he his unable to payback the loan. The future financial health of your company is important which is the more reason you shouldn't take the loan.
Read: How to Get a Loan from First Bank of Nigeria in 2023
4. Risk of investment
If you intend to borrow money for investment purpose you should consider the risk, return and duration of the investment. Are they in line with the duration of the loan? Will you be able to get your returns on investment before the due date of the loan? You should only go for investment with high return i.e an investment with returns higher than the cost of your loan and low risk. There is every probability that the outcome of the project will deviate from expected. This is why you shouldn't take the loan.
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5. Cashflow forecast
What are your series of cash flow like? This will determine your repayment capability. A business with a negative cashflow position might not be able to meet up with his debt obligations. Negative cashflow in the sense that the business has more outflow than inflow. If your cash inflow isn't steady and you have a negative cashflow position then you shouldn't take that loan or else you arw sure to end up in a mess.
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