I have read too many contents in the past few weeks painting credits & loans in a bad light, especially for small businesses. This can be very misleading. Let me quickly tell you about the concept of Other People's Money OPM) & Other People's Time (OPT) & why it's not bad. Thread
As you already know, I like to simplify things. So I'll use very simple examples. First, that you run your SME on 100% equity (you) does not make you better than someone who runs it on 50% equity & 50% debt. In fact, you may be worse off, depending on the type of business.
Some of the world's most successful businesses & people took advantage of other people's money to build large businesses & assets. E.g. if I have 1m and want to do a business that requires 1m investment with 30-40% margins annually, I have three choices.
1. Do it alone with my 1m
2. Do it alone with PART of my 1m & debt
3. Do it with others
Option 2 & 3 is what OPM is about. Now lets go back to the margin 30-40%. If I put in all my 1m, I'll own the business 100%, with the freedom to do anyhow & own all the profits. Good yeah? But I also bear all the risks
So e.g., if the business fails or anything happens, I may lose all my 1m & maybe more. So it's always good to weigh the options well before going alone. For Option 2, I can take 500k or N0 to do the biz, borrow 500k or 1m at 20% interest, I'll still have 10-20% of my margins left
I simply split returns with the bank as interest till I complete repayment & own my business fully. I'll have built a business, made money & bought assets using the bank's money. Don't forget I still have my 1m or 500k intact, depending on how much I borrowed. There are risks too
If business fails, bank can sell your assets, etc. But at least, you have nothing much in financial investment to lose, & you still have your 1m to do other things. Again, this is a simplification of it. The last option is using 500k out of your 1m & joining with a friend's 500k
Both of you become co-owners in the business, you share risks and share returns. The risk is lower on you, the returns are also lower, but with a lower risk and higher chance of success (if the partner is solid). This is because your partner may bring other skills to the table.
And remember, you still have your 500k intact to do other things. Dangote, for example, took massive loans to build refinery & most of his plants. Heck, he even took a loan from Dantata to start his business (according to available records). The art of using OPM is a skill.
Another industry is oil and gas. About 35% of total banking sector loan exposure is to Oil&Gas. So the industry essentially gets rich on the banking sector's money. Don't let anyone make you feel bad that taking loans for your business is bad. Utilising it well is what matters.
I will write about Other People's Time some other day. I am tired of writing already. Have a great day and God bless you good. Don't forget to follow @LagoSMEbootCamp for updates on our events.
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