Uganda: Loans Can Be a Magic Bullet or the Poison for SMEs

FOR many a potential entrepreneur, capital is the magical bullet that does not just kick-start, but can make the difference between success and failure. Capital refers to cash or goods used to generate income either by investing in a business or a different income property. It is also the net worth of a business.
Alongside land, entrepreneurship and labour, capital is the other factor of production.
Raising equity or owner's capital for any venture is often a challenging task for Small and Medium Enterprises (SMEs).

While some sell off assets like land, buildings and vehicles, many opt for loans.
A loan is a financial transaction in which one party (the lender) agrees to give another party (the borrower) a certain amount of money with the expectation of total repayment with interest.
The borrower must agree to the repayment terms, including the amount owed, interest rate and due dates. Some lenders can also assign financial penalties for missed or late payments.
In dishing out loans, financial institutions consider the type of business. Seasonal ventures like selling umbrellas and Christmas cards call for short-term loans albeit frequent repayments.
Loan financing of a business depends on the stage of development that venture stands and the ability of the business to service its debt.
The movement of cash into or out of a business or project affects loan application and should enable borrowers to service debts.
The expected purpose of the loan is paramount as a long term loan is not effective in seasonal working capital needs. The level of risk the lender is willing to take. When a bank or MFI is willing to take a high risk, it focuses on riskier loans like long-term loans.
Advantages of SME loan financing
It is a tool for self-empowerment, enabling the poor to access capital
Loans better technology by providing the means to purchase machinery
lEnsure purchase of productive assets as an entrepreneur replaces worn-out assets like machines with new ones, leading to improved efficiency and effectiveness
Promotes risk taking that is the bedrock of business success

The high interest rates that some commercial banks and micro-finance institutions charge, sometime in excess of 20%, is deterrent and exploitative
Conning and fraud by some briefcase MFIs have left many people even poorer as they run away with their money and assets like land titles
Jail and imprisonment is a common occurrence if one fails to re-pay a loan. This can be detrimental to personal and business success
Forfeiture of collateral.
In most cases, banks can dispose of assets pledged as collateral, leaving victims on their knees and in tears
Loans, too, keep borrowers in vicious cycle of 'begging', with their businesses failing to be self-sustaining.