A couple walked into my office some years back for advice on the right funding for their business. After analysing and asking questions, we concluded they could take a loan, and I advised them on the right product for their business. As they were about to leave, the lady turned back and asked, “hope your company is not one of those that operate with bad money? We hear some lenders are diabolical.”
In economics, bad money is a currency with a value equal to or lower than its face value. In this context, we’d contextualise it into a business structure.
Seeing my reaction, she shared some stories of how some people had taken funds and could never repay. Some resulted in the loss of assets for these people. In a nutshell, the result of borrowing led to a fall to grass from grace.
I invited them to sit again. I responded that not everything is sinister, and it could have been those people’s carelessness or lack of financial literacy. I know there is such thing as good money and bad money for your business. The characteristics of the money brought into a business reflect the requirements of the investors.
I asked questions like: did they have clear plans for the funds injected into their business? What was the plan to pay back? Were the funds injected into the business a right fit? There is such a thing as the right timing for funds in the business too. Was the money accessed at the right time? Did they divert the funds to meet other needs besides what they were given the money for? Did they analyse before making that diversion? Did they understand the terms of the agreement?
Quite frankly, lenders can be anyone in this case, including family and friends. I have heard many stories of how funds have been taken from these family and friends and how village people came knocking thereafter. One of the mistakes I have encountered with business owners is thinking they must accept funds whenever it is available without a clear plan. After all, this is free money. But the question is, “Is it really free?’”
Business owners also hardly properly analyse whether a loan would work for their business or if it’s the right fit. Unfortunately, this category of people sometimes falls into the hands of unstructured lenders or close relatives who won’t ask the right questions.
Businesses need to ensure that when they borrow money, they collect from structured lenders, or at least people who would ask them genuine or the right questions to understand their business. Questions like: What do they plan to use the funds for? What is/are the source(s) of repayment? How long would the repayment take? Is there a track record of previous borrowing? How was it handled? Are there current business borrowings? Can the business take on the debt? Is it possible to raise funds internally, that is, from the cash flow profits the business is generating? I say cash flow profits because not all profits mean liquidity. What is the current profitability of the business? How else can you pay back the loan if anything goes wrong?
The above questions are non-exhaustive. Asking these questions also forces the business owner to think through what they are about to get into and check if they have done their analysis correctly and need the loan.
If you, as a business owner, have ticked all the boxes right, you should still ask questions, and ensure the loan you are collecting fits with your business’s cash flow. Know the terms and conditions for which you are accepting the funds, know the associated charges/fees for that money, and know what happens if there is a delay in payment. What penalties accrue to you? How can you avoid these penalties? Check that the money you intend to collect for your business is not ‘bad’ from the get-go.
After you take a loan, ensure to use the funds for what you took it for. Otherwise, you risk it becoming bad money. Also, make sure to meet your repayment as at when due to avoid penalties. Life also happens in business; keep your lender(s) in the know and be truthful. Running away helps no one, and it can become worse.
So, yes, there is such a thing as bad money, albeit not in the way one might think. If the funds gotten are not a right fit for your business, improperly planned or diverted, it can harm your business, and things can go really bad. Conversely, there is also good money. With funds adequately utilised for the business purpose for which it was gotten, your business should see the benefits.