Tom (name changed) invited me to his plot just outside Harare last week. He had a story to tell.
I remember meeting Tom sometime mid last year when he was doing the run around looking for a loan and I was helping him with developing his business plans.
Tom told me how his fresh vegetable production business used to do so well a few years ago that he was exporting significant tonnages every quarter to European markets. But somehow things turned bad during 2010, when market prices fell and he made some big losses. He started struggling to pay back a bank loan. His working capital levels were constantly too low to finance the necessary inputs for his production cycle.
When he came to me last year, Tom desperately needed another loan: to pay his various creditors as well as the bank, to buy essential inputs and also to meet operating expenses. He was quite distraught as he panicked over creditors constantly breathing down his neck.
I gave Tom the advice I always give all entrepreneurs who are seeking loans; that is, the cheapest, safest and least stressful source of finance for your business is you- your own internal resources. If you use your own savings or income from your existing operations, no one is going to pressure you to pay back. At that time Tom was so panic-stricken that he said his current operations were producing too little income to pay back his debts. The only solution he could think of was to get that loan! He reasoned that the new loan would reduce the pressure from his creditors and he would use part of it to purchase inputs that will expand his production and therefore generate more revenue and cash flow to pay back the new loan.
Tom first approached his own bankers but they said there had no funds for lending at the time. Another bank told him to first open an account and operate it for 3 months before he could apply for a loan. Three months ago Tom followed up with the new bank, but his application had not been processed. After pestering the bank staff consistently and out of desperation, he managed to secure a meeting with the manager responsible for SME customers. Tom told me the manager was very friendly and patiently listened to Tom’s story.
After hearing all the details, the manager politely explained to Tom why another loan was a very bad idea. She advised Tom to do what I had told him at the beginning nearly a year ago: to used the existing business to generate the money he needed.
Tom went home and thought carefully. A few days later he decided to forget about getting a new loan, but to focus on using the little resources available to increase his production and generate more revenue. Having been in the agro-industry for nearly a decade and knowing a number of input suppliers; he approached them and asked for some credit facilities. Amazingly enough, his major seed and agro-chemical suppliers where understanding and gave him some products on credit. With strict costs control, Tom actually managed to generate significant revenues in each of the past two months, enabling him to pay those suppliers who gave him inputs on credit. He has been reinvesting his profits into the business and has managed to clear a quarter of his overdue debts. At this rate, Tom hopes to clear all the debts by June and double his profits as the reinvestment into his production cycle start bearing fruits.
Tom regrets that he did not embark on this strategy earlier last year, as he would have quickly gotten out of debt and be enjoying increased profits already.
Plan B will work, if you really apply yourself and commit to it. The only thing that limits our progress or success is our mindset: if you believe it’s possible, no matter how deep a hole you are in, you will get out. So always explore other options and don’t think someone else’s loan is your only solution. Think creatively and use the resources you already have.
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