DEALING WITH DEBT

As an entrepreneur forced into business I have learnt over a short period that our mindset has to be very different to those of others. I will over the next few weeks try to start to focus my blog in a personal way so maybe someone can learn from my experiences. It is my hope that in sharing my experiences with you I too may learn from those who are generous enough to comment with your own views. I will begin with Debt....

1. Debt is like a drug- *Banks are the drug dealers

When beginning a business, you major financing will come from within your close spheres and yourself. Cash is usually tight; and those that lend or invest will do so because of the personal relationship of the entrepreneur ( more than the business itself). As you begin to grow the business and establish a track record, the more established sources of finance will seek to finance you. Be weary of this sudden interest in your business.

In Africa, most financial institutions do not take a growth outlook to your business. This means the financiers are first and foremost driven by profit and if you are not profitable to them, they will be vicious in recovery of cost. Due to the cost of capital here most financial institutions look to short lending cycles and highly collateralized loans. The high collateral options allow them to liquidate your assets for fractions of their value thus keeping their business safe with little exposure. So if you borrow you have to remember this, borrowing is addictive and paying back is like withdrawal from addiction.

When I first started my business, I got a substantial loan from a mentor of mine. I had worked for him in business for a couple of years and he thought it was time for me to move on (rather than keep analysing theoretically how good businesses are developed). I believe he wanted me to walk the talk. Very quickly my business began to expand. To meet the growth I got financing from my bank. I bought more equipment with the same and happily paid back instalments.

My first challenge came up when a couple of clients started facing difficulty paying me, and this resulted in failing to keep up payments with the bank. This created a cash flow crisis that my bank understood but had no empathy for. They just wanted their money and I had to deliver the same no excuses. I was lucky that I had business acquaintances who through my reputation saw me as a reliable bet. They were able to assist me and coupled with assets I had to sell, I came out of the crisis other wise I would have been broken by the experience. But my survival also predicated on my second point:-

2. Attitude is everything 

When accessing finance you have to be acutely aware that funds have to be very prudently managed. As a black African we are burdened more often than our white counterparts with the need to solve problems of family, friends and neighborhood (Most often referred to as the "black tax"). This can be quite burdening, we also tend to be a little flashy when we do have money (Mercedes Benz culture). To survive the pitfalls of early cash flow expansions attitude is key. Firstly, never use borrowed money for consumption... even if you have borrowed $1 million don't even use 1cent for consumption as every cent you use has to be paid back with interest. so if you consume debt, you will make yourself poorer by having to repay the money, the interest and still need to consume in the future.

Even after planning and prudent use of debt sometimes things still go wrong. In this state we need to note the following:

a. Make a decision and act fast. The "head in sand" phenomenon is the main reason why most entities get inundated with debt. At the first instance ensure that you take action to start knocking down debt and change of direction.... none of that lets see what happens next month attitude! Remember only a crazy person expects a change in circumstance by doing things the same way. the more radical a change needs more radical an action.

b. Start at the top, look for biggest savings. Nothing sends the right signal through an organization like cost cutting at the top. When one has to make deep cuts, starting at the top sends the right tone. Austerity can only be justified and carried if the top ends are hit first.

c. Overlook short term optics for long term goals. In simpler terms do not care what the neighbours think. If you have to make short term adjustments such as selling a vehicle, T.V. etc to extinguish debt. Do not hesitate! It is always better to take action before you are being forced, so as to get a better deal. If the liquidator is called in you usually get no value.

     

3. Debt must always be invested.

I whatever you do from today onwards, always use debt in two ways- either to increase cash generation or asset base. whenever a loan is offered to you ask whether you are increasing cash generation or asset base. Be careful what people call an asset - they are not always assets in your situation. In Zimbabwe a vehicle used to be seen as an asset not many years ago as due to depreciation of the Zimbabwe dollar and arbitrage opportunities in the economy. you could drive the vehicle and as long as one looked after the same it would get a relatively good value when you on sold the same. Today in real terms and real currency, as soon as you purchase a vehicle it's retail value drops considerably. But if the vehicle helps improve your cash generating ability it can be invested in.

This attitude can also be followed at a national level. if you are borrowing for consumption you are making poverty worse for tomorrow.

In conclusion, please note that any investment taken up carries a certain amount of risk, and when one borrows to fund that investment the risk grows greatly. However, without risk growth in business may never occur. So please be learned in you investment so you don't fail and be disciplined with money when you get it. this is very important if we want to see the end of poverty on our continent.    

Till next week!