I watched a video clip of Segun Agbaje, Group CEO of GTCO. In his responses to the numerous pleas for banks to grant loans to the youth, he said something very interesting. He was ready to lend, but the youths should know how debt works.
What happens after the loan?
A loan is not money given freely; it needs to be repaid.
This may sound obvious, but most of the discussions about entrepreneurship revolve around raising funds, forgetting what follows raising them.
Prior to borrowing funds, you need to know clearly what these funds will do to your venture and how your business can raise enough money to pay off the loan.
A good idea will make people look at you, but repayment of your loan is what the lender will care about.
Do you know the difference between revenue and profit?
Imagine your business is earning sales of ₦10 million. Your company has earned revenues worth ₦10 million. Your company has not earned a profit of ₦10 million.
There are costs that you still have to incur, such as payment of salaries, purchasing inventory, rent, logistics, marketing, and many other costs.
The profit will only come after incurring the aforementioned costs.
The knowledge of the said distinction is important, as revenue might give the impression that the business is much larger than what it actually is.
Is profit enough to repay a loan?
Absolutely not.
It is possible for an organization to be profitable yet unable to manage its finances effectively.
How so? Well, profitability and cash are two entirely different concepts. While your customers owe you money, your vendors, labor force, and creditors will demand immediate payment.
That is why cash flow is crucial.
An enterprise must have enough money to settle all obligations on time. Although the loan can be guaranteed by collateral, an organization requires cash to service it.
Cash flow makes the wheels of the enterprise spin.
Should young people avoid borrowing?
No.
Debt can help a healthy business grow. It can fund equipment, increase inventory, open new markets, or help a business take advantage of an opportunity before it disappears.
The problem isn’t borrowing.
The problem is borrowing without understanding what the money will accomplish or how you will repay it.
Debt can accelerate growth, but it can also accelerate failure when the underlying business cannot generate enough cash.
So, what should come before capital?
Financial literacy.
Before borrowing ₦10 million, take a moment to ponder: Why must I borrow it? What will it yield? At what cost will I borrow it? How long will it take me to repay it? And more importantly, where will the repayment money come from?
These are not questions you need to answer after obtaining the funds; rather, you should be able to answer them before getting the funds.
The young people of Nigeria need financial resources, but more importantly, they need the knowledge to manage those resources.
Money can start a business; financial literacy determines if the business can sustain the money.