Things to consider before taking a loan to finance a business

1. Will the business be able to generate the cash flows to pay back the loan?

This is the core consideration. You should be sure that the business will not only manage to pay it back, but also have money left for operations and meet your profit targets. You want to make profits, so the business has to first of all generate enough cash flows to pay off the loan. Once you pay the loan you still have operating costs. Once you pay those, will you still be able to make a profit? The worst case scenario should be that you will pay off the loan and pay the operating costs, but you should be able to make some profit.

   Edwin Dande, CEO, Cytonn Investments

2.  Is longevity assured?

Always think long term. Do not just take loans for immediate needs with little impact on future needs. Is your business sustainable enough to have longevity, in order to not only pay back the loan, but also build from the loan? Once you get the loan, it does not end there. You get it and then you build on it, so you can sustain your business further. Your business should be able to stand on its own two feet for a while after that.

 Suzie Wokabi, Founder of SuzieBeauty

3. Should you really take a personal loan?

Does your business have the capacity to repay a personal loan? You get this kind of loan as unsecured and not tied to the business. However, even if you taking the loan as a personal loan, you do not want to be the one to repay the loan, because it will strain you. Make sure your business can do this. The mistake many people make is, because you qualify for the loan as an individual and you have the capacity to use your salary, you just take it, since you are not qualifying the reason you are taking it. You do not have to show whether the business will be able to generate enough cash flows to repay it, but you should have done this as an individual before taking it. Otherwise, personal loans for business can mean its demise.

   David Tanki, Executive Director of Lan-x Africa Limited

4. Is my plan solid?

What plan do you have? You cannot take a loan just to grow your business. That should be the final part of the process, the intention to grow it. Is everything that you have in place ready to make the business grow? If you are absolutely sure, then you can take the loan. If not, ask yourself if there is any other way to get the money as you come up with a rock solid plan in case you need the loan later on.

    Michael Muthiga, CEO of Fatboy Animations

5.  What is the true purpose of the loan?

When you are taking a loan, you take it to generate income. It is easy to take a loan and misuse it, or put it in a project that is very long term, which makes it very difficult to recoup the return on investment. You need to understand what you are using the loan for, be disciplined and stick to your plan. If you were planning for a project you should have evaluated it on paper and when you get the money use it only for that intended purpose, without diverting any of it.

  Simon Kabu, CEO, Bonfire Adventures

6. Are you the sole owner?

A big question you should ask is whether you are the sole owner of the business or not, and linked to that is whether you are the main decision maker. If not, then you would be carrying the risk burden alone and potentially putting your personal property at great risk. I have seen entrepreneurs lose a lot this way. Either way there is a lot of risk, but it is multiplied many more times if you are not the sole owner and/or you are not the main decision maker. The other owners/decision makers will have less to lose and may not make as careful decisions or put in the necessary work to grow the business to the point where it can comfortably repay the loan. I am a firm believer in shared burden, shared commitment, shared benefit.

      Wandia Gichuru, CEO of Vivo ActiveWear

7.  Will the returns be higher than the cost of the loan?

Will the return on investment on the money you are borrowing be more than the cost of the loan? If you are, for instance, paying 20 percent interest on the loan, the return on investment must be higher than that, otherwise you will lose. This means putting in a lot of work in the business and also shopping for the lowest interest loans

   Manyara Kirago, founder and Managing Director of Financial Counseling