LOANS AND LOAN RESCHEDULING.

I have met people who have told me that they do not borrow. They have told me they fear the pressure that comes with Bank Loans, along with the high interest rates. For some, they do not borrow because they do not have financial demands that exceed their resources, for some they just have enough money to meet their financial demands of any magnitude.

Well, I have also told my friends that for some people, it is impossible to achieve dreams without borrowing because the only way you can raise a certain magnitude of funds is by borrowing and then pay back in installments.

In the absence of a huge salary, a huge inheritance, or theft, It is simply the only way to a acquire property and develop property because savings might never be sufficient however good you are at saving.

But also some people do not borrow because they are comfortable living within their means. Simply not ambitious.

So borrowing is born out of personal choice, personal goals, determination and maybe no other source of funds. Some people have huge/massive goals, some people are happy with a mediocre life, some people are even happy to live on handouts. Some people have no dreams and some people just want to stay in “their comfort zone” however uncomfortable it might be.

Incidentally, I have not met or heard of any self-made billionaire that became successful without borrowing at some point of their entrepreneurship. As Peter Drucker said; “whenever you see a successful business, someone once made a courageous decision” Many times the courage includes borrowing.

However this is not to say that people should just borrow even if they have no capacity to pay back the loan.

In business, as in personal lives, we all have bills to care of, and when they overwhelm us, we opt to take up loans. Of course, the plan is usually to pay as soon as possible to avoid high-interest rates, but sometimes, nothing goes as planned so you might find yourself in need of much friendlier terms to repay the loan. In such a case, you will seek debt restructuring to prevent defaulting on your loan, which can have quite an array of adverse consequences. While it may seem like your only way out, it has its advantages and disadvantages.

Advantages

Low-Interest Rates

The essence of opting for debt restructuring is to make it easy for you to repay your loans without affecting your business. One of the things creditors will do is lower your interest rates. High-interest rates can put a strain on the repayment schedule. Hence, you can agree with the lender to lower the interest rates at first until you are back on your feet again, then they can use whatever rate they feel is appropriate. The great thing about a lower interest rate is that it has a domino effect. First of all, you do not pay as much as before, meaning that you have more money available to run your business. Once you have enough cash flow, the growth of the business is inevitable.

Keeping Business Afloat

You settle for more favorable terms in your loan repayment plan due to the payments burdening you. If the scenario persists for a long time, it could sink your business because you will not have enough money to operate effectively and efficiently. It can especially be difficult for a business trying to launch; it could be on the deathbed even before it is on its feet. With much more improved repayment terms, you can rearrange your finances to ensure that you keep your business afloat. After all, you will be paying much lower interest rates, and some creditors might even lower the principal amount to be repaid.

Better Financial Management

At home, you might have different bills coming in at varied times of the month, which can make budgeting for cash difficult. The same case happens in business; if you have several loans with different repayment times, your cash flow can be affected. Some management plans ensure that the debts are consolidated into one. As such, you will only have repayment per month, making it easy to keep track of your finances. Budget it also takes much less time.

Protect Business Assets

Usually, whenever a business takes up a loan, it has to provide collateral, and assets worth a lot of money are listed. Upon facing some financial constraints that make it impossible to repay a debt, creditors will rush to take the listed assets and sell them to recover their money. With debt restructuring, such an eventuality is unlikely to happen. With minimum payments and lower interest rates, you are better positioned to repay your debt, thus protecting the business assets. If you take up debt restructuring fast enough before creditors move to sue you for defaulting, you prevent them from executing liens.

Disadvantages

Credit Score Could be Negatively Affected

According to Money Life, debt restructuring while offering relief to those struggling to keep up with their debt repayments could still suffer later when they need a loan. Although banking officials disclosed that restructuring your debt will not affect your credit score, this article highlights an issue that might be overlooked. A high credit score is attractive to lenders because it indicates you are creditworthy. However, if you take up a loan for restructuring, lenders can indicate the purpose for which it has been availed, making future creditors wary of your ability to handle your finances. As a result, your credit score goes down, and even the chances of you getting a credit card for personal use significantly declines.

It Can be Expensive

Whereas restructuring gives an interim relief, you latter realize it is more expensive especially when you reschedule the loan. The installment definitely increases once you resume paying and therefore you realize that it was a mere postponement of the problem. And you could easily spiral back to where you started, under a lot of pressure and overwhelmed.

Prolonged Repayment Period

The future is dynamic, and you probably had not factored in different things that would make it impossible to repay your debt on time. Unfortunately, that will cost you; the longer you take to pay, the more the interest paid, which is why borrowers are advised to repay their debts soonest possible. Although it may seem like the creditors are doing you a favor by lowering the interest rate, you are only prolonging the inevitable. Therefore, it is no wonder that personal financial management courses are advisable for anyone who cannot repay his loan on time.

​Compiled by; Nassuuna Rebecca Irene

corp.consults@yahoo.com ; nassuuna@nassuunaadvocates.co.ug

+256752648063