This article is dedicated to my co workers at Maktech Telecoms- TZ Office . I should have shared this info a bit earlier, well better late than never
Every business at some point in its operating cycle will require some form of finance to pay its short-term indebtedness, fund new projects, or to acquire operating assets.
Individuals at some point in their lives may also need bank loans to help fund the purchase of a car, mortgage for a house or buy house hold appliances. But to get a loan there are important information you must be aware of. Here are some of them;
1. You need to formally apply to a bank for a loan – When most people decide to approach a bank for a loan, they typically believe a business plan is all they need.
However, not all businesses require a business plan but all loans must require that you apply to the bank formally. As such you must properly articulate your needs in your application letter.
2. Banks charge interest on a per annum basis and they are not fixed – banks do not charge interest rates per month but per annum and on the outstanding balances.
For example, when you apply for a loan of Tzs 10m for a three-month tenor at an interest rate of 20 per cent, your interest will be TZS 500,000, which is 20 per cent of TZS 10m apportioned for just three months out of the 12.
The interest rates offered to you are also not static and can increase or decrease depending on market conditions.
3. Different banks offer different interest rates and terms and conditions – Just the way the price of goods and services differ in the market so does the interest rates and terms and condition banks offer.
Whilst some might favour you in terms of lower interest rates, others might include shorter repayment period.
4. Never ignore the terms and conditions – Bank Offer Letters always include a set of “Other Terms and Conditions” or “OTC” which complement well known conditions such as interest rate, tenor.
Most fail to read these additional conditions and usually results in the bank having enormous powers over your business and determining what it can do in times of dispute.
5. Banks always ask for a collateral or some form of security – Banks, no matter the type of loan you ask for, will demand some form of collateral, especially if yours is a small business. It could be a landed property, asset or even your personal guarantee. However some banks offer unsecured loans, which are even more expensive eg. Salary Loans
6. Defaulting in repaying your bank loan when it’s due doesn’t mean the bank will take over your business – Yes, banks like to avoid the disputes as much as you do and, quite frankly, want you to succeed because your success and theirs are directly proportional.
Even if you are short on payment when due, you must make effort to service the loans as much as you can. This is useful and shows good faith, especially when you are seeking a restructuring or refinancing of the loan.
7. You can always attempt to refinance or restructure your loan – Following from above, you can always approach your bank to restructure your loans if you think the current terms are not favourable to you.
And it is not also when your loan is bad that you can approach a bank. You can also approach them when your business is doing well and service your loans promptly.
Refinancing your loan involves approaching another bank to take over your existing loan as a new lender.
8. You can ask your bank for a moratorium – A moratorium is simply a bank permission to a borrower to suspend repayment of principal for a period of time. Because some businesses require time to start making money. A grace period that is.
Banks recognise that and will often allow borrowers a period of grace (one month, three months, one year etc.) where they only pay interest and resume paying interest and principal at the end of the moratorium. That way the business can use the extra cash to invest in the business.
9. The biggest threat to defaulting is not your interest rate but your Debt Service Coverage Ratio – Your DSCR is simply about cash flow compatibility.
The cash you generate must be able to cover the repayment of your loans and interest after you deduct your operating cost. If this ratio is less than one, then you are more likely to default and face the wrath of the bank.
10. Banks have hidden charges – Apart from the interest rate banks charge, they also charge you fees and C.O.T. But, off course, we are familiar with these.
However, banks also have other cost which they mostly do not tell you when you apply for a loan. You should have your accountant frequently scrutinise and analyse your bank statements for any sign of charges other than those agreed with the bank.
These tips are not exhaustive and must be paired alongside the unique peculiarities of banks. For example, some banks are good with SME financing and others with trade financing. Make sure you identify the right bank that understands your business and your goals.