Getting your business ready for a loan

A loan can help a business grow faster: more stock before the festive season, a second freezer for a cold store, a new dryer for a salon. A loan can also sink a business that was doing fine, if it is too big, too expensive or taken for the wrong reason.

This guide is about the work you do before you walk into a bank, a savings and loans company or a microfinance office. Good preparation makes a yes more likely, and it helps you pick a loan you can repay without sleepless nights.

Know exactly why you need it

Lenders always ask what the money is for, and "to expand the business" is not enough. Be specific. "GH₵ 6,000 to buy a second chest freezer, so I can hold more fish and chicken and stop turning customers away on Fridays" is a clear answer.

A good reason for a loan usually earns money that pays the loan back. Extra stock that sells quickly, equipment that lets you serve more customers, or a bulk purchase at a better price can all do that. Borrowing to cover everyday shortfalls is riskier. If you are always short of cash, the cause may be in how money moves through the business, not a lack of money. Our article on cash flow and profit explains the difference.

The records lenders ask for

Every lender is different, but most will ask for some of the following:

• your Ghana Card and proof of where you live and trade
• business registration documents, if the business is registered
• bank and Mobile Money statements, often for the last six to twelve months
• a record of sales, ideally month by month
• a profit and loss summary showing income, costs and profit
• details of any loans you already have
• sometimes a guarantor, or something to hold as security

If you are not registered yet, registration is often the first step. See registering a small business in Ghana.

Get your statements in order

Your statements are often the first thing a lender studies, because they are hard to fake. They show how much money really comes into the business and how regularly.

The biggest problem for many owners is mixing. When sales, school fees, family support and personal shopping all pass through one MoMo wallet, it is very hard for a lender to see how the business is doing. Move business money into its own account or wallet and keep it there. Even three months of clean business-only statements can make a big difference.

Alongside statements, have your own monthly figures ready: total sales, total costs and profit for each month. If you record sales and expenses in Snnel, you can download sales and profit and loss reports as PDF, and the Growth Hub has an MSME loan application section where you can apply with your business details in one place.

A simple business plan

For a small loan you do not need a thick document. One or two pages answering these questions is often enough:

• What does the business sell, and to whom?
• How long has it been running, and what are sales and profit each month?
• How much do you want to borrow, and exactly what will you buy?
• How will that purchase increase sales or profit?
• How much can you repay each month, and from where?
• What will you do if sales drop for a month or two?

Be honest and use your real numbers. A lender would rather see modest figures they can trust than big promises they cannot check.

Choose a loan size you can repay

This is the most important step, and it is your decision, not the lender's. Start with what the business can spare each month after paying all its costs and what you take home to live on.

Take a provisions shop in Kumasi. After all business costs, it makes an average profit of GH₵ 4,000 a month. The owner takes GH₵ 2,000 a month for the household, which leaves GH₵ 2,000 a month spare. Some months are slower than others, so the owner wants to keep a cushion and not commit all of that spare money to repayments.

The owner compares two loans over 12 months. The charges below are only an example; your lender will quote its own.

Loan A uses GH₵ 1,200 of the GH₵ 2,000 spare each month, leaving only GH₵ 800 for a slow month, a broken fridge or a sick child. Loan B leaves GH₵ 1,200. Unless the bigger loan clearly brings in more profit quickly, the smaller one is the safer choice. You can always borrow again once you have shown you repay well.

Before you sign

• Read the whole agreement, or have someone you trust read it with you.
• Check what happens if you pay late: penalties, extra interest, and what can be taken as security.
• Ask whether you can repay early, and whether there is a charge for doing so.
• Make sure the repayment dates match when your business has money, for example after market days.
• If you are asked to be or find a guarantor, make sure everyone understands what that means.

Once the money arrives, use it for exactly what you said, and keep recording sales and expenses. Your records over the life of this loan become the evidence for the next one.