MONEY LENDING BUSINESS ANALYSIS
To begin, let me warn you against borrowing money. The circle of borrowing does not end easily. You will keep borrowing to settle previous debts it this has the potential to slow your progress.
With that said, let's jump into the analysis.
DO A CREDITWORTHINESS ASSESSMENT
Creditworthiness assessment is checking if the potential client will be able to pay back. Understand that borrowing money is like crack cocaine to money borrowers and they will even get what they cannot afford to pay back. Don’t just lend anyhow, have a limit for each customer to avoid chasing people around. In order to avoid a heart attack at an early stage, perform a simple creditworthiness check by requesting the person’s proof of monthly income. e.g. 3 months payslip matched with the bank statement. These are not decorations for filing, look at the payslip! What is there? Of course, he gets paid K20,000 ZMW but what is the net amount down there? Has he got advances due? Bank loans? The payslip will also let you know when the person gets paid so that there won’t be stories about payday or money not coming through.
Make sure that the repayment amount per month is not over 40% of the person’s net pay. E.g. if his net pay is K10,000 ZMW, make sure the amount he pays back doesn’t go above K4000 ZMW. If you go beyond then you are asking for problems. That person needs to eat, pay rent and support his/her dependants, I tell you that person will prioritise family before you so evade that risk.
DON’T LEND RELATIVES OR FRIENDS
Do you want to demonize yourself? Go ahead and lend a relative or friend. You will get calls from your grandmother all the way from wherever she is telling you about forgiving the person for having your money. The persons' spouse will hate you for asking for your money, his/her children will hate you, too. Your own spouse will also intervene asking you to forgive them. This is a touchy subject and you don’t want to deal with relatives or friends owing you money.
Do you value your friendship?
If you do, do not lend them money. If I were you, I would lie that you have a partner you work with who will not allow relatives or colleagues. I would also try and run this business secretly because your biggest customers will be friends and relatives who don’t intend to pay you back.
Better to refuse point blank when they ask, better they get upset for a while than ending up losing your money and hating you forever.
HAVE LIQUID COLLATERAL & PROPER DOCUMENTATION
Ensure that you write whatever transaction you undergo with the customer. Have adequate and clear supporting contractual documentation.
Collateral is your only cushion in this business in case of none payment. Always get collateral! People will pay you until they don’t pay you, always remember this.
Collateral should be something easy to sell. You need to get things that are in working order and are easily sold. Don’t go get someone’s old couch which he doesn’t even like or a car which doesn’t move. Make sure that the collateral is 2 or 3 times the value the person has taken so that it is painful for the person to let go of it. Also remember that collateral has to be 2 or 3 times more because incase of none payment, your interest on the loan will increase and you want to make sure the collateral is still worth the increased amount If you do not do this the person might just calculate and see that they are better off just letting you take the collateral than paying you. E.g. you get a TV as collateral for a loan of K2000 ZMWat 35% interest, then the person skips 2 months without paying you. He then realizes that the interest is now K1400 ZMW (35% x K2000 x 2 months). He says to himself that the TV is not worth 3400 so let the moneylender have it, so you remain with a TV valued at K2000 ZMW and K1400 ZMW lost in interest! What will you do with the TV now? Watch Looney Tunes?
DO NOT ACCEPT INTEREST PAYMENTS
Some customers will tell you about paying you interest whilst they come up with your money. They will talk to you about renewing the loan each time. That is not business, it is a ticking time bomb. This is an indicator of default of payment. The debtor will eventually stop paying you the interest because as humans, they will have a notion that they have already paid you somehow. Interest payments are not business, look at it this way.
If I lend Ivy K10,000 ZMW at 35% interest, Ivy owes me, K13500 ZMW at the end of the month.
But if Ivy gives me interest only of K3500 ZWM (35% x K10,000), I will only recover what he was supposed to pay me in the first place in 4 months (13500/3500). So what I should have earned in a month, I earn in 4 months at a time I find out that Ivy won’t be able to pay me the K10,000 the principal that he borrowed. It’s better to start pushing early for loan clearance so that the collateral value doesn’t go below what the customer owes before you sell it.
Why do you want to keep lending the same person money every month? It means he/she is a credit risk, how can you need a fix every month?
If the person insists let them pay the full principal amount and interest in cash then renew the loan. See the money come in then give them. This is for your assurance that the person is able to pay every month.
DON’T THINK OF DEBTORS AS PEOPLE
Don’t see your debtors as people, see them as investments. If you are seeing them as people with families, children and dependants you will not run this business effectively. You must mean business. The problem when you are too friendly with people, they will take you for granted and not pay you. Very serious and just be there for business.
FINANCE PURCHASE ORDERS FOR SUPPLIERS
An avenue you may consider venturing into with your money is to look for suppliers who need financing for big projects. You can use the purchase order as proof of the service they are about to render. This is nice clean big money if you are able to find a supplier.
In fact, they will find you.
Invoice discounting also guys, this is where a supplier has invoiced InvestCorp but has not been paid yet. The supplier may need a quick cash injection to pay workers and keep the business afloat. Using their invoice, you can pay the supplier less and wait for payment from InvestCorp. E.g. if the supplier invoiced for stationary of K20,000 ZMW, you can pay the supplier to say K16,000 ZMW and wait for InvestCorp to pay K20,000 ZMW where you can earn K4000 ZMW (K20,000 – K16,000)
SHARE BUSINESS PROPOSALS TO ENGAGE CLIENTS
You can also make money by participating in an entrepreneur groups and blogs like this one. You can share business ideas and if the person likes the idea and willing to try, you can finance the idea.
You can also finance business ideas and have a stake in the business. Of course, you need to know what you are doing here.
OFFER LEASE FOR REVENUE GENERATING ITEMS
Buy machines that are used to generate revenue like sharwama machines, butcher boys, Maize meal grinders and give them out on a lease to people who can manage them. You can sell them the machine at a large profit and charge it over a period of time at which when complete will be theirs. This is another stream of revenue.
DEDUCTIONS FROM PAYROLL
Some small companies do not have a lot of red tape over their payroll systems. You can easily lend employees money and it can be recovered from their pay by the accountant. This is the best and safest way of running this business without collateral. If you talk to management about the benefits of having you advance employees, you can make money smoothly; you get one big fat cheque from deductions from employees.