For a young startup without any track record seeking financing, an SME business consultant is cautioning against relying solely on bank loans.
He argues that every loan comes with a return ticket, which is the interest to be paid. For a young entrepreneur who has not yet made a first sale, the interest can be hard to pay.
Dickson Assan, a Chartered Accountant and SME Business Consultant, made gave this caution on the last edition of The High Street Talks, organised by The High Street Journal. He backed an earlier argument by digital finance specialist Maame Yaa Owusu-Amoah that bank loans should not be the first stop for startups and small businesses.
Justifying his view, he noted that whether the money comes from a bank, a friend or a mobile quick loan such as MTN’s, it must be repaid. So the real question, he said, is whether the business generates enough cash flow to service it. If the answer is tentative, or anything short of 100 percent certain, he advised not bothering with a loan at all. Banks, he noted, will also find it very difficult to lend to a business with no track record.
Start with savings
Dickson Assan urged young people to build the discipline of saving before they start. This feeds what he called bootstrapping: selling, then pushing the proceeds back into the business.
The hustle, he said, is what builds a business to the point where it has cash flow and a record of running successfully.
Other Options
For those who need outside money early, he outlined what finance people call patient capital, meaning money the provider does not need back immediately. It comes in three forms:
- Family: relatives who can support the dream financially.
- Friends: people with spare funds who may believe in the vision.
- Fools: investors who have not assessed the business plan but have money and a willingness to invest.
He added a caution about the first F. A family’s refusal to back you, he said, may say something about how the whole arrangement is structured, but it is not a pronouncement that the business will fail. In that case, he said, speak to friends.
When a loan makes sense
Assan said a loan becomes sensible once a business has grown, has steady cash flow and faces real customer demand. At that point, the money can buy equipment or bring in new staff to meet the demand.
He was equally clear about the wrong reasons to borrow. Taking out a loan because you want a bigger office in East Legon, or want to feel like a “big boy” or “big girl”, is, in his words, a very small reason to go for any loan.
The Bottomline
Taken together with Owusu-Amoah’s remarks on crowdfunding and merchant-platform lending, Assan’s view lays out an order of operations: save, bootstrap, tap patient capital, and approach lenders when demand and cash flow are in place.
For young founders eyeing the bank on day one, his question is worth answering honestly: can the business pay the loan back?
