Helmke Sartorius von Bach | Jul 1, 2020 | 0
Small business owners should borrow wisely to curtail risks – Development Bank
The Development Bank of Namibia (DBN) Head of Marketing and Corporate Communication Jerome Mutumba, warned that when Small and Medium Enterprise (SME) owners set out to apply for finance with a high degree of confidence and certainty there is great risk that the results of the operation may fall short of expectations.
Mutumba stressed that responsible borrowing takes into account the financing needs of the enterprise, but also considers the level of the expenditure and the cost of financing. He added that SME entrepreneurs should follow the approach of larger enterprises and plan for finance in a conservative manner.
Talking about the level of expenditure, Mutumba used the example of a start-up SME that purchases a delivery vehicle. He explained that although the borrower might apply for finance for a newer or more expensive vehicle, a reliable and guaranteed older vehicle may be of as much utility as the new vehicle, however with a significant cost reduction. The older vehicle should also be less of a risk in terms of financial burden in terms of repayment of the finance.
“The savings made on the purchase of the older vehicle may enable the SME to pay the salary of a productive employee for a number of months, or pay for the purchase another productive asset. The spin-off from reducing the level of expenditure is a lower cost of financing. The repayment will consist of two elements, repayment of the principal and repayment of the interest. If the level of expenditure is lower, the monthly amount and the monthly interest may be lower. Alternatively, the duration of the loan may be shorter,” Mutumba explained.
He further noted that both of these approaches have significant benefits for the enterprise, as greater profits are a result of the lower expense of repayment of finance, either immediately if the lower amount is repaid for a longer duration or in the medium term when the repayment ceases earlier.
“Opening an SME or expanding one is a proud moment for the entrepreneur, but finance should be applied to provide a higher degree of potential profit and saving. Ultimately this increases the value and security of the enterprise. The Development Bank of Namibia has a mandate to finance SMEs and so it is a responsible lender. This not only includes providing finance, but also counselling against unnecessary risks adopted by borrowers,” he said.