With the current lockdown and our attendant inability to work and earn income effectively, there may be a need to borrow or increase our borrowings. Even without the lockdown some of us may need loans to help us achieve our financial goals faster. Debt is misunderstood by some people. They think borrowing is a shameful and proudly announce that they do not owe anyone a kobo. Who could blame them? The first rule in my secondary school was “neither lend nor borrow.’’ That may work for teenagers but could be a hindrance in adulthood. However, some people go to the other extreme and amass more debt than they can manage, leading to sleepless night and financial ruin. How then can we manage debt optimally?
Debt involves buying goods or services with someone else’s money. Debts include taking an actual loan, using a credit card, collecting goods without paying upfront, etc. There’s a price to pay for the advantage – that price is either built into the price of the goods ab initio or spelt out as interest payable. Those of us who buy goods from “car boot” vendors should not be deceived into believing it is interest free.
Borrowing can help one take advantage of a time bound opportunity, which if one were to wait to generate the funds by oneself, the window of opportunity could close. Borrowing helps to fast track growth by making funds available to do bigger transactions and so enjoy economies of scale. A trader who borrows to buy additional merchandize would enjoy higher discounts for buying in bulk and be able to make a wider profit margin than her colleagues.
Some have taken loans from our employers for which deductions are made from our monthly salaries, this reduces our already insufficient take-home pay and makes us a susceptible to integrity lapses to “make ends meet”. Such loans should only be taken for medical emergencies. We should strive to maintain a rainy-day savings account for unplanned expenses like car repairs. Avoid consumer debt (for buying clothes, TV, smartphone etc.). Debt should be used to generate income, that is the only way the interest element would not become a heavy burden.
When borrowing, consider the following factors. Cost of Funds – what is the interest rate payable on this loan? Sometimes the interest rate may be high but if the tenure of borrowing is short, it might still be worth exploring. Market Price – what is the price of the items to be purchased by the loan and the margin to be made from the transaction? Price Stability – how stable are the prices? If they are volatile and fluctuate like company shares on the stock exchange – you cannot guarantee that you would make a positive return to pay the principal talk less of the interest accrued. Ease of Exit – how easily can you exit the loan? Since banks can change their interest rate at will, can you easily back out of the loan when your transactions can no longer accommodate the interest obligation?
Entrepreneurs who borrow for their business need to confirm that the cash accruing from the business can service the debt (repay principal and interest as and when due); make a comfortable margin that covers all business expenses; and deliver a worthwhile profit to them at the end of the business cycle. That requires careful computation of revenue expectations based on historical data from the business.
This underscores the importance of proper recordkeeping. Please note that debt servicing should never be more that 33% of Income.Startups do not have historical data to base borrowing (especially repayment) decisions on, so they should not borrow at the initial stages becausethey do not understand the cash flow patterns of their new businesses, so they should not be committing to rigidly fixed repayment plans – this is a mismatch. It is best to do crowdfunding from friends and family to finance startups.
Let us not be afraid to takeloans if our income flows have been adversely impacted by the lockdown or any other genuine reason. However, we must ensure that the debts improve and not worsen our financial situations. Shop around for best rates, conditions, repayment terms etc. Watch out for loans with low interest rate but withadditional fees. These flat fees make the loan expensive; because they are usually paid upfront, their value is higher than backend payments. Repay loans as quickly as possible – the longer the tenure, the more Naira you pay as interest.
Debt is very beneficial if managed properly. Let us be prudent debt managers. Happy investing.
Buhari Signs Proclamation Order On COVID-19 Management
President Muhammadu Buhari on Monday signed the Proclamation Order on the General Management of COVID-19 in Lagos, Ogun, Kano, the Federal Capital Territory and other states in Nigeria. It is in line with the measures outlined in his nationwide broadcast on Monday night on the containment of the virus… Read full story
Face Masks Made Of Clothes, Papers Only Reduce, Can’t Prevent COVID-19 Spread, Says NAFDAC Boss
THE National Agency for Food and Drug Administration and Control (NAFDAC) on Monday said that the use of non-medical face masks, which include self-made or commercial masks or face covers made of clothes only reduce and not prevent spread of the coronavirus disease… Read full story
Coronavirus: Top NYC Doctor Kills Herself
A top New York City doctor who was on the front line of the US fight against coronavirus has killed herself. According to BBC, Dr Lorna Breen, who was medical director of the emergency department at New York-Presbyterian Allen Hospital in Manhattan, died of self-inflicted injuries on Sunday, police said… Read full story
What Buhari Told Nigerians
President Buhari in his address highlighted some of the new measures on the relaxation of lockdown. They are: a. Selected businesses and offices can open from 9am to 6pm; b. There will be an overnight curfew from 8pm to 6am. This means all movements will be prohibited during this period except essential services;… Read full story
Oil Spill: Ondo Communities Lament Losses As Farmlands, Rivers Get Polluted
That cold morning, Samuel Oriade set out to the river as usual for his fishing business, only to discover that the whole river and adjoining lands in the community had been polluted by what appeared to be an oil spill later discovered to have been caused by an alleged equipment failure in a facility of an oil company in the… Read full story
How COVID-19 Pandemic Has Slowed Down NASS
FINALLY, the National Assembly is set to hold an emergency plenary today, April 28, 2020 specifically to give accelerated consideration of the request by President Muhammadu Buhari for the passage of the N500 billion intervention fund, as well as an approval for the utilisation of over N100 billion… Read full story
CBN Lifts Suspension On Cheque Clearing
The Central Bank of Nigeria (CBN) on Monday lifted the suspension placed on interbank cheque clearing. The new order comes into effect as from Tuesday. This first indication of the lift of the suspension was given during a press briefing addressed by chairman of the Presidential Task Force on COVID-19, Mr Boss Mustapha… Read full story
COVID-19: Fayemi Extends Lockdown In Ekiti By Six Days, Relaxes Sit-At-Home Order For 3 Days Weekly
Ekiti State Governor, Dr Kayode Fayemi has extended the current lockdown in the state for six days till Sunday, May 3, 2020. The governor said that the lockdown declared since March 29 will now be relaxed from Monday, May 4 and allows for limited activities for three days in the week which are, Mondays… Read full story
Borno Govt Confirms Shehu Of Bama’s Demise
Borno State Government has confirmed the death of His Highness, the Shehu of Bama, Kyari Ibn Umar Elkanemi, who passed on Monday afternoon in Maiduguri. He died in his mid-60s. Commissioner for Home Affairs, Information and Culture, Babakura Abba Jato took advantage of a routine media briefing usually held… Read full story
What Exactly Held Abba Kyari Back?
A few days ago, the remains of the Chief of Staff to the President, Abba Kyari, were committed to mother earth and as expected after the demise of a public figure, the torrents of eulogies from both high and low ranked officials, friends and allies to ordinary members of the society have been overwhelming, with some measuring in… Read full story
and then