Warning: Maths ahead.
Everyone of us at some point in their life has a million dollars idea. The difference is that some follow through with their idea and see it through while for most it merely remains an idea. One hurdle you will face if you decide to follow through is finance. Unlike in Silicon valley where there is a well established ecosystem of startups and support networks, it can be very tough to get money to fund your pet project here.
Ever since the adoption of the multi currency most businesses and individuals have struggled with the liquidity squeeze. It is hard to get loans from banks as a lot of them require some sort of colateral security in case you default. Traditionally houses have been used as security but given how it is also hard to get a mortgage in this current economic climate most upstart tech entrepreneurs do not own immovable property and sometimes your ex-Jap vehicle will not cut it as security. The result is that people are caught in a vicious circle where they cannot get funds from most official places.
The temptation therefore is for you to go to any one of the “micro-finance lenders” that have mushroomed everywhere around the country. Every time I am in town I see their posters where they promise “quick and easy loans” that can be “processed without a hustle.” You need to be aware however that “when it sounds too good to be true, it is too good to be true.” Most of the time the interests rates required by these people are well above what you will ever get from your start up.
Do the math
Some of these back alley microfinance houses ask for as much as $40 per every $100 they lend to you. This translates to 40% per month simple interest. Since you get to pay interest on interest if you fail to pay it essentially means the amount you borrow is being compounded 12 times per year. For our example you will end up paying
(1.4)12 = 56.693912375296
56.693912375296 – 1 = 55.693912375296
55.693912375296 x 100 = 5569.391
5569.391%
In other words for every dollar you got you will end up paying over $50 if you keep the loan for a year and if you fail to pay up the loan which will most likely happen.
An example
To avoid getting an overly expensive loan you need to do extensive market research and prepare forecast financial statements which are based on the most realistic scenario. For example if you decided to begin a start-up that acquires and re-brands smartphones and tablets for the local market from say a Chinese Original Device Manufacturer you will need to be realistic about how many tablets you can sell in the first month at a given selling price. To avoid falling into debt you will also need to calculate the return on capital employed from selling your products.
For example: If it will cost you $120 dollars to import two tablets that you can sell for a combined price of $200 in a month’s time then the return on capital for the month is:
(200-120) / 120 = 66%
Rule of thumb
The rule of thumb is that if the your Return on Capital Employed is greater than the loan interest then you should go ahead and get the loan and conversely if the loan’s interest is greater than your Return on Capital employed then you should not get the loan.
Using our example 66%>40% so in this case you should get the loan
If however you can sell the tablets for $160 the resultant Return on Capital will be 33% which means you should not get the loan as you will certainly fall in debt and lose your collateral.
NB
- The return on capital should include all the costs of doing business including rentals, transport costs etc. We have employed a very simple example to aid understanding it is likely to be more complex in the real world.
- Also the revenue forecasts should be based on prudent estimations not wishful thinking.
- If you are not versed in Business Mathematics you might need to take a crash course or employ/consult someone who is otherwise you might find yourself in the jaws of a loan shark. A grasp of Polynomials and Calculus in Business will be invaluable to you.
- Few businesses, if any, can realistically expect to pay off a monthly loan interest rate of +10% unless if your business is in Wonderland.
Be safe stay away from the sharks otherwise your dream project will turn into a nightmare.
Picture via crisisandrecovery.com
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16 comments
Not an accountant guy but that is how loan sharks operate. I avoid them like a plague and have included my bank on that plague list!
One question, doesn’t the Duplum Rule apply?
It does, but people are just not aware and they usually go to these guys because of desperation.
Tell that to Frank Buyanga and his thugs.
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good advise. thanks
I think the advise should always be:
dont go to these loan sharks ever (they are usually not regulated) and always seek professional advise from an accountant where you can
Just like Wonga, 500% interest. Dont try it
Those people are us off!
“Rip us off”
I know, darn auto-correct.
Good and informative article.
Right on the money bro.
Anyone with info about Bancbc’s loans?
In regards to your question. My little advice is that you go to a bank in your area to request for the loan, and that is if you have a collateral, but if you want a loan from those that give out unsecured loan without a collateral i know of a loan firm that gives out unsecured loans, though he is the only one i have tried for now so i don’t really know if their interest rate is the lowest. Few months ago when i had a bad credit, a friend of mine introduced me to them, inspite of my bad credit they were able to lend me a loan of $20,000 of which i used to revive my business, I think you too can do the same as well. Here is their contact information if you wish to contact them. (hai_ying43@yahoo.com)
Regardless of your nationality, i am sure they can be of help to you.
Good Luck,
Della Roland.
I would like to have there contact details please. I tried to email them but the email address you mentioned above does not exist please if you know of any people who do chimbadzo let me hace their true contact details
Do you need easy qualifying Business or personal loans from $3,000 –
$50,000,000? Bad credit or Good credit, makes no difference with us. 3% of
applications are approved within 72 Hours. To apply, get in touch with us
via E-mail:loangaurantee@gmail.com
Or fill the loan application form below and send to us via
E-mail:loangaurantee@gmail.com
HOW DO I APPLY
Please Fill this application Form below:
{BORROWER’S DATA INFORMATION}
*(1) Loan Amount Needed:
*(2)Loan Amount Needed In Words:
*(3)Full Names:
*(4)Country:
*(5)Valid Cell Phone Number Or Tel Phone:
*(6)Purpose Of Loan:
*(7)Address:
*(8)Occupation:
*(9)Gender: Male Or Female:
*(10)Nationality:
*(11)Loan Duration:
*(12)State:
*(13)City:
*(14)Age:
*(15)Monthly Income:
Regards,
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TEL:(+1)904-513-0194
Web site:http://hartman-morgan-loan-inc.bravesites.com
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