Resources

Get a Loan?

Choose roles and act out the following.

CARLOS: Today’s a big day. I’m getting a business loan!

NAOMI: You’re getting a loan? For what?

CARLOS: Everything. I’m going to make a bigger room for my inventory. I’m going to get a new TV and other things at home, too. I’m so excited!

NAOMI: Wow, that’s scary. You just started your business last week. Carlos, you shouldn’t be getting a loan. Maria, how is your business?

MARIA: It’s good. I sell my eggs very quickly. I usually sell all of them by 9:00 in the morning. But the rest of the day when customers ask about eggs, I don’t have any more.

NAOMI: Maria, you really do need more chickens. How is your loan for more chickens coming along? Do you have the loan yet?

MARIA: Not yet. I am a little afraid to get a loan. Maybe I shouldn’t get a loan. You just told Carlos he shouldn’t get a loan.

CARLOS: I’m still getting a loan. It’s going to solve all my problems!

NAOMI: Or create a whole lot of new problems. Carlos, I’m afraid you’ll quickly have a mountain of debt that will crush you.

But Maria, in your case, a loan could actually help you.

MARIA: How would I know if a loan would help me or crush me?

NAOMI: Successful business owners use the “Four Rights” to decide if a business loan is a good idea to grow their business.

MARIA: The Four Rights?

NAOMI: Yes. Only get a loan if you have the right reason, the right time, the right amount, and the right terms.

CARLOS: I don’t care about the Four Rights. I’m getting my loan!

MARIA: I care. I want to grow my business, but I don’t want a mountain of debt. Tell me more about these Four Rights.

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Right Reason?

Choose roles and act out the following.

NAOMI: Your reason for borrowing has to be for business, not for personal reasons.

CARLOS: Why not both? I’m going to enjoy my TV and make my store bigger!

NAOMI: Oh, Carlos! Now listen, Maria, a loan should be for things you can sell right away, like bottles of milk, or something that produces immediately, like a chicken laying eggs. Remember, you have to start repaying loans immediately!

MARIA: Okay. So I could buy chickens that are already laying, and I would have eggs to sell immediately.

NAOMI: Great! Have you considered using cash from your business to buy more hens, instead of getting a loan?

MARIA: Wait, I thought you said I should get a loan.

NAOMI: With cash, you save now and buy later—less growth but less risk. With a loan you buy now and pay later—more growth but more risk.

CARLOS: Yeah. “Pay later” sounds good to me!

MARIA: Customers keep asking for more eggs. I want to sell more eggs soon!

NAOMI: Is a loan worth the risk? Have you thought about what could go wrong?

MARIA: I haven’t! But, I guess hens might stop laying. Or they could die or be stolen. Or customers might stop buying eggs.

NAOMI: How could you reduce those risks?

MARIA: Hmmm. I could feed the chickens quality feed and take good care of them. I could lock them up so people couldn’t steal them.

NAOMI: Do you think you have the right reason to get a loan, Maria?

MARIA: I think so.

Back to page 129

Right Time?

Choose roles and act out the following.

NAOMI: Maria, how long have you been in business?

MARIA: I’ve been selling eggs for eight weeks now, and it is going well.

NAOMI: Very good! Some people get loans for businesses they have just barely started—that’s very risky!

CARLOS: Hey, are you talking about me? I know what I’m doing.

NAOMI: Maria, you’ve run your business for a while, but is getting a loan part of a plan you made to grow your business?

CARLOS: Here’s my plan: Bigger store, sell more!

MARIA: Carlos, that doesn’t sound like a plan to me. I plan to get a loan, buy more chickens, sell more eggs per week, and pay off the loan.

NAOMI: That’s a good start to your plan, Maria. You’ll need to determine the specific numbers of chickens and eggs, though. How confident are you that customers will buy more if you have more to sell?

MARIA: Oh dear, I think they will buy all my eggs, but I don’t know for sure.

NAOMI: You might want to find out first!

MARIA: Ok, I’m going to talk to customers and make a list of everyone who would buy. I’m going to talk to at least 10 of them.

NAOMI: Great. If you decide to get a loan, a list of future customers will help you show the lender you understand exactly how you will use the loan.

NAOMI: Ok, here’s another question. If you borrow money to buy new hens, will they continue laying eggs even after you have paid off the loan?

MARIA: Oh, of course. The chickens should lay eggs for at least another two years, and I plan to get a six-month loan.

Back to page 130

Right Terms?

Choose roles and act out the following.

CARLOS: Hey! I got my loan! 1000 at a flat 3% per month interest rate.

NAOMI: Oh, Carlos. I’m worried for you. How many lenders did you talk to?

CARLOS: One, of course. I don’t waste time. You should have seen me. I walked in and said, “I want a loan—now!” And they said, “Yes, sir.” They treated me like a king. Those guys love me.

NAOMI:Yeah, I’m sure they love you. Are those your loan papers? Do you mind if I look at them?

CARLOS: Go ahead. But be prepared to be impressed! I got a great deal.

NAOMI: Carlos, these terms are terrible. 200 in up-front fees? Weekly payments? Have you even looked at these terms?

CARLOS: What? That can’t be right. I don’t remember those things. Oh no, I guess I didn’t really look very closely.

NAOMI: Maria, what terms have you found?

MARIA: Well, I have talked with three lenders so far. Thanks for giving me the lender worksheet from your self-reliance group. That really helps me ask good questions. I’m really glad I learned about possible penalties, interest rates, fees, and commissions.

Two of the lenders had flat interest rates. But one lender has a declining interest rate.

CARLOS: What’s the difference?

MARIA: I don’t really understand the difference. I just know that if the rates are the same, declining is better than flat.

NAOMI: That’s right, Maria. It sounds like you are starting to find the right terms.

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Right Amount?

Choose roles and act out the following.

NAOMI: Carlos, are you okay? You look depressed.

CARLOS: You were right, Naomi. The penalties are piling up, and a mountain of debt is falling on me.

NAOMI: Carlos, I’m so sorry to hear that.

CARLOS: The lender came and took away my television. If I miss another payment, he says my business supplies and equipment are next.

MARIA: Carlos, it doesn’t sound like you have enough cash flow.

CARLOS: Cash flow?

NAOMI: That is the money moving in and out of your business. Right now, you don’t have enough money coming in to cover the loan payments.

CARLOS: I didn’t sell as much as I expected. I was late on some payments. The penalties are adding up and making it even harder for me to make payments.

NAOMI: Carlos, that is why you need a six-month cash flow statement before deciding on a loan. Have you ever created one?

CARLOS: No.

NAOMI: A cash flow statement helps you know if you can afford to make the loan payments each month. Do you have income statements from the last two months?

CARLOS: No, I don’t.

MARIA: I can bring mine and the cash flow statements I’ve been working on. We can show you how.

NAOMI: Good! We’ll help you create a cash flow statement. Then you’ll know if you are borrowing the right amount.

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Four Rights Checklist

Ask yourself these questions. Check off each question when you can answer “yes.”

FOUR RIGHTS
Right Reason?
Am I borrowing for a productive business (not personal) reason? Is a loan better than cash to grow my business? Will the things I buy with the loan make me money immediately? Do I know everything that could go wrong?
Right Time?
Have I been in business long enough to know my business well? Is this part of a plan I have to grow my business? Can I prove that customers will buy more if I have more to sell? If I buy something for my business (like a chicken or truck), will it last longer than my loan?
Right Terms?
Can I list three to five good lenders? Do I know the true cost of the loan? Can I explain all of the terms of the loan? Can I explain why one lender is better than another?
Right Amount?
Have I made a six-month cash flow statement? Can I make a payment and still make money? If I don’t have extra sales, can I still make the payment?

Loan Terms Worksheet

Take this Loan Terms Worksheet with you when you visit lenders.

• Ask the lenders questions 1–4.

• Ask yourself questions 5–6.

LENDER #1:	LENDER #2:	LENDER #3:	LENDER #4:
1. Qualifications: What do I need to give or show you (the lender) to get a loan?
2. Payment Frequency: When is the first payment due? How often do I need to make payments? Can I have a copy of the repayment schedule?
3. Penalties: Are there any fees or penalties if I do not pay on time?
4. Direct Costs: If I borrow 100, 1000, or 10000 (pick one amount based on local currency and use it for each lender), how much do I pay after I’ve paid off the loan, including all interest, fees, etc.? If I borrow enough for one asset, for example, one chicken, how much extra do I pay by getting the loan? How much are up-front fees? How much is each payment? Is this a flat or declining interest rate?
5. Indirect Costs: How much time does it take to make payments? How much does it cost me to go to the lender to pay?
6. True Cost of the Loan: What is the total of direct costs and indirect costs? (Add the costs from questions 4 and 5.)

Six-Month Cash Flow Statement

Copy this cash flow worksheet to your business notebook. Use one for each lender to see if you can afford the loan terms you will learn about this week.

CASH FLOW
Lender Name:
	2 Months Ago	Last Month	This Month	Next Month	Month 3	Month 4	Month 5	Month 6
Total Income
Fixed Expenses
Loan Payments
Variable Payments
Total Profit/Loss
Starting Cash
Available Cash

Notes