Why You Shouldn’t Use Bank Loan To Start A Business- Expert Explains

As the push for more Nigerians to start their own business rather than wait for paid jobs heightens, a financial expert, Kalu Aja, has revealed why it is harmful for an entrepreneur to use loans as startup capital.

One of the greatest challenges entrepreneurs face in Nigeria is how to raise cheap funds to execute their business plan.

Nigeria’s soaring interest rates are as high as 27.59 per cent for unsecured loans or customers with low credit ratings while the prime lending rate is around 13.99 per cent.

Aja said, “Even at one per cent (interest), you the business owner, are paying out cash in interest payments, which should go toward growing the business.”

The business expert believes every person who wants to start a business should avoid any funding that takes cash away from the business in its early stages.

Aja said bank loans are suitable for meeting the short-term cash flow needs of businesses and not as equity capital.

“So, what are banks for? Working capital, means you use banks to bridge your short-term cash flow needs,” he said.

He explained further, “For instance, you have a confirmed inflow in the next 2 weeks, but you need cash today to meet payroll. You can access a bank’s line of credit, and then clean up. Short-term, very quick, preferably low APR.

“Note cash flow is not the same as equity. So, how should I fund my business idea? Well with equity (ownership) for a start, your savings, Family, and friends in seed funding Why?

“Because it’s ‘patient’ capital, it is like profit sharing, the new businesses do not have to pay out valuable cash. In summary, do not borrow cash to start a business.”