Is it easier to borrow or save Sh1 million?

Money is a very powerful tool. If you use it well, it’ll make you rich; use it poorly, and it’ll make you poor.

Every business needs funding at some point in the business cycle, but not all types of funding have the same impact on your business.

One of the best ways to finance your business is with money from your savings or from selling personal assets. Unfortunately, many owners of small enterprises don’t have the financial muscle to raise capital themselves. They, therefore, rely heavily on external sources of funding, especially loans.

The main advantage of a loan is that you’re not giving up any ownership of your company, and the lender has no management control or direct entitlement to a portion of your profits. The only obligation you have is to pay the loan back on time.

However, while interest can be deducted as a business expense at tax time, the burden of repayments can be heavy when the business is young and has intermittent cash flow.

But keep in mind that it’ll take about five years to save Sh1 million from a monthly deposit of Sh15,000, earning approximately 5 per cent interest. On the other hand, it would take two to five days to borrow Sh1 million if you have a good credit rating.

The challenge for a small business owner is keeping a good credit rating while cash flow is both slow and low.

There are several other methods for raising money for your business. Use your imagination to locate them. For example, established businesses can offer their resources to support your business for a small share of your profit per unit product sold.

[Patrick Wameyo, a financial literacy and entrepreneurship coach]