If you must borrow, first exhaust your options

Abigail Namusoke, a businesswoman in Kampala, applied for a Shs360,000 loan through an app. Since her son’s school requires parents to clear school fees through mobile money to the school bursar.

The next day, she received a message from the app indicating that her loan was payable in two instalments, with the first instalment set at Shs486,000. Upon seeing this, she assumed they had adjusted her payment schedule to three instalments.

Sixteen days later, she received a message stating that the deadline for clearing the first instalment had passed and the amount had increased to Shs519,000. She was informed that she had to clear the first instalment within eight days of receiving the loan, a detail that had not been communicated to her at the time of loan disbursal. 

That evening, she paid Shs219,000 and another Shs300,000 the next morning to the money lending app, totaling Shs519,000.

But, upon clearing that amount, she received another message stating that her second instalment is Shs486,000. Namusoke rang them, and they told her, initially she had to clear Shs720,000 inclusive of their interest, and this money accrued a lot of interest when she defaulted on the first interest.

After complaining to the person at the other end of the line, she was beseeched to at least clear Shs300,000 more. But after clearing that amount, she received another message saying she has a balance of Shs180,000. After voicing her concerns, she was urged to clear an additional Shs300,000.

However, even after settling that amount, she received another message indicating a remaining balance of Shs180,000.

Imelda paid an interest of about Shs840,000 on the Shs360,000 loan.
Mr Newton Buteraba, a financial advisor and wealth coach at House of Wealth, warns that borrowing from a lender can cause financial risks. A bank lends at 25 percent interest, per annum and a money lender wants 25 percent per month.

Co-signing a loan can lead to undue financial burden, as you may become beholden to the lender.
If you borrow from a money lender, he notes that it should not be for a business. It should maybe be for an emergency, for example, in instances when the bank fails to release money in time.

Borrowing for business
Mr Buteraba does not recommend people to borrow when they are starting business. The business should be operating as a going concern.

“Such that when you boost it with some money, it will go at a greater length of making more money. The reason is that when you go to a bank, and walkout, the bank has already given you a payment schedule,” Mr Buteraba says.

You cannot borrow to start a new business when you do not know where you will get the money to refund, who you will even sell to, or whether the product you have is the right product.
So, there must be an existing entity which already has some customers and is making profits or has promise for profits. 

Mr Buteraba asserts that one should craft a business plan to guide borrowing, beyond qualifying or satisfying a needy.
“If they give you a lot of money on your account without a proper business plan, you may start wasting it,” Mr Buteraba says.

You need a business plan to showcase how the business is functioning, and actually what the money is going to be like and given the market trends, how you are actually going to be able to pay.

A business plan not only showcases your business’s current operations but also outlines how borrowed funds will be used. It also validates financial sustainability, especially in light of market trends, and ensures your ability to repay.

Seek advice from financial advisors
Mr Buteraba says that when borrowing, rely on guidance from financial advisors and lawyers.
Banks offer standard contracts, legally designed by the institution, leaving little room for negotiation or modification on the borrower’s end.
“You will only be going to sign. In the event that you go to the bank without a lawyer to interpret to you what the clauses mean, and to showcase the troubles and dangers of signing on such a document, then you are in very big trouble,” he says.

Borrow as last resort
Before turning to a financial institution, explore alternative sources of funding. 

Buteraba does not encourage people to borrow, saying you can start by saving that money slowly and becoming your own lender.
Other than that, Mr Buteraba says if you saved your money, let’s say you have found a venture that needs Shs20m, ask yourself is how much you can be able to set aside every month.

“If you can put aside Shs2m every month, in 10 months, you will have the Shs20m and you will be borrowing from your own coffers, instead of going to the bank which has interest,” Mr Buteraba explains.