Growth & Jobs | Preparation is key to securing a business loan - Financial coach
Published:Tuesday | November 8, 2022 | 12:05 AM
Rose Miller, lead for financial empowerment programmes at the JN Foundation, is stressing the need for entrepreneurs and those aspiring to get into business to carefully prepare for the loan application process to improve their chances of accessing credit.
“The question you must ask yourself is, ‘What is the level of my indebtedness? Am I [already] up to my neck in debt?’” she suggested, when assessing whether to borrow.
Miller was addressing the JN Foundation workshop ‘Get Smart About Credit’ recently at the JN Group corporate office on Oxford Road in New Kingston. The session was also streamed to registered participants.
She advised entrepreneurs that it is important to first assess either the business’ or their own ability to service the loan being sought. If after preparing a budget it is clear that the loan repayment cannot be accommodated, immediate corrective measures should be implemented, including provisions for reducing any current debt.
“You can start by paying off the debt with the lowest balance first, then move on to the next lowest, while paying the minimum balance on all other debts; this is the debt snowball method. This method compares with debt avalanche, where the debt with the highest interest rate is tackled first, while paying the minimum balance on all other debts,” she advised.
She suggested debt consolidation as another option. “When you have five or six loans, you can consolidate them at one institution. What that does is give you a little fiscal space each month. But I’m going to caution you, that fiscal space that you receive, it is not to be used to get into more debt. It is a time to hunker down and try and get some stability,” she emphasised.
To reduce and manage debt, she also encouraged persons to cut back on expenses and seek ways to increase streams of income, for instance, by monetising skills or hobbies.
Commenting further on the preparation process to access loans, Miller emphasised that persons also need to pay attention to organising all necessary documents.
“Ensure [that] you have basic documents, your Tax Registration Number, your ID, proof of where you live, these things (documents) will hold up your application process [if not available at the time of application],” she noted.
Turning to the main factors that will determine eligibility for a loan, she cited the ‘five Cs of credit’ that applicants should always bear in mind when seeking to borrow: character, capacity, collateral, conditions and capital.
She said a loan applicant’s character is normally assessed based on credit history or pattern of loan repayment; while capacity is adjudged based on ability to repay. Capital takes into consideration funds that an applicant already has and the associated risk level of the loan transaction. This could also be an amount in reserve to support continued servicing of the debt in the event of an interruption in income. Conditions of the loan take into consideration the interest rate, tenure and method of repayment of the loan, among other things.
“Collateral is anything of value, an asset that is used to secure the repayment of debt in the event of a default on the loan,” she concluded, as she explained the five Cs of credit, reminding participants that there was no way to bypass these steps when applying for credit.
The JN Foundation’s ‘Get Smart About Credit’ workshop series is an initiative of the newly established JN Financial Academy, which is aimed at empowering Jamaicans to achieve financial freedom by providing information, training and mentorship.
The next workshops will be held virtually on November 17 and December 1. Persons who may have missed the first session are invited to visit the JN Foundation website, www.jnfoundation.com, to register for the upcoming ones.