By MWANGI MUIRURI

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Martin Njoroge vividly remembers the financial scare that almost left him a beggar in 2006. He was an employee of a Nairobi based firm, his terms of service being contractual. Raring to join the ranks of small-scale investors, he approached a local bank and secured a loan of Sh120,000 which he intended to invest in a plot in Nairobi’s Ruai area.  His security for the personal loan was his salary account with the bank which also handled his employer’s financial transactions. Three months later, his employer ran into cash-flow problems and could not pay him regularly.  Njoroge’s recurrent expenditure became burdensome and soon he was using the loan to settle his bills instead of channelling it to the intended investment. Realising he was headed towards financial disaster, Njoroge took Sh80,000 from the same loan and deposited it back with the bank as service. In short, Njoroge had run into a bad loan that didn’t serve his intended purpose. Today, he uses the irregular salary that he gets to service his balance — which still attracts high interest in default.

Management trainer and consultant Mr Wanjumbi Mwangi says there are many cases like this.

“We have people who either through bad personal financial organization or just through ill luck end up with a bad loan,” he says. A bad loan is simply credit obtained that eventually becomes unservicable. The opposite of this is good loan, which not only serves the intended purpose but is serviced as per the terms and conditions agreed upon between the creditor  and the debtor.

James Ambani, a financial analyst in Thika, says many aspiring small business owners are the worst hit by bad credit.

“Most of them jump at any cash that is offered. The prospect of raising money looms so large that it appears to be a greater incentive to acquire credit,” he says.

Eventually, in their rush, he explains, they fail to draw a financial plan catering for the intended business mission thus having no projections on how to utilize the credit.

“It is important that in acquiring credit for investment you articulate on whether you want it for stock, rent, hiring staff, making products, or finding customers,” he cautions.

Mr Ambani says the alluring communication from the bank manager that “your loan has been approved” might be the onset of a far-reaching financial mess.

“Put enough emotional distance between a bank’s money and your needs. If you have not consulted widely and articulated the use of the cash solidly enough, let the loan remain intact with the lender,” he cautions.

Some of the causes of a bad loan include, borrowing for no specific purpose, unforeseen outcomes in business and personal fortunes as well as indiscipline in pursuing the objectives of the loan.

Mr Ambani says a bad loan can be overcome.

The first reaction should be to avoid panicking, just accept the crisis and immediately get a financial/management consultant for advice on a counter re-strategising.

He adds that you should renegotiate for the service period with the creditor.

That lenders undervalue collateral is no secret.

“If push comes to shove, seek approval from the lender that you sell the collateral on your own and clear the loan,” he says, adding that you should not force an unviable investment to remain afloat through a loan.

Mr Wanjumbi tells of an incident he was hired to help remedy.

There was a group of young women who thought they had carefully charted a plan for building a jewellery business.

They had put up most of the initial start-up funding using credit from a bank.

They resigned from their jobs in order to get a Golden handshake, which they pumped into the business as equity.

“But the manufacturer they had contracted couldn’t make quality products as per clients specifications. A lot of the jewellery fell apart when it got to the stores. Another misstep was when they bought too much raw inventory. Profitability was not forthcoming and the loan had to be serviced,” he says.

Wanjumbi says he looked at their cash flow, immediate and long term expenditure — that included the monthly instalments for the loan and had only one piece of advice: “Sell the business as soon as possible!”

Viable enterprise

Whereas banks routinely assist borrowers in trouble, such intervention is only extended to a debtor experiencing minimal financial risks but not those on the fast lane towards insolvency, he says.

“A viable enterprise experiencing cash-flow problems can get an intervention from a bank. Such intervention might be including management from the bank’s investment section and placing the business’ assets as collateral for a second loan,” he says.

He says: “With the wisdom that comes from experience, I’ve learned that bad loans don’t just happen to cautious entrepreneurs.”

“Rather, smart entrepreneurs are tempted all too frequently by the lure of a bank loan — even a bad one ... Take your time and evaluate all loans carefully. Sometimes being granted a loan can be the worst thing that ever happened to your personal finance,” he says.

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Reproduced from the Business Daily.