Quick Money

There are two ways of doing business: The well prepared and strategic way that encompasses research, business plans, relevant paperwork, and then implementation; or the crisis way of quick explanations, problem information, and urgency in resolving the bottlenecks.

Experiences show that very few business people and companies go the strategic way and carry out their businesses in an incremental and predictable manner. The majority of Zambians especially in the micro, small, and medium business sector tend to react to business challenges rather than to plan and respond to the ever changing business pressures.

If one speaks on behalf of the majority reactionary business practices, it becomes necessary to carefully understand the various processes of acquiring financing, and the impact and consequences of each option of doing business.

Reactionary decision making in a business motivates the business person to rush off to the bank and seek support. The banks have very clear guidelines when doing business, and even clearer guidelines when lending out money to customers. Banks initially want to know what service the customer is seeking from the bank. The banks then check the balances of the customer’s account and look into the history of transactions that have taken place in the last three months or so. The next step is for the banks to request a business plan from the customer which highlight the company’s strategy to liquidate the intended debt. Finally, the banks request some security which may cover savings, life insurance policies, monthly salary and other receivables, immoveable property, and other assets.

These demands are not easy to put together and therefore appear to be monumental tasks to any business person that is in a hurry to access quick money. Today, banks typically offer loans, overdrafts, and leases at interest rates of about 30 percent per annum. This is the cheapest form of money available and the terms can be renegotiated if the customer is performing very well in the eyes of the bank. Banks in general are concerned about the viability and sustainability of the customer in an effort to reduce the possibility of default and to support the customer to build the business from one level to the next in a manageable manner.

For many Zambian companies, the banks appear to be too demanding and too slow in making money available to an institution or person that wants to transact quickly, so they look elsewhere for a quicker deal.

The next port of call for the average business person is the Micro Financing Institution (MFI). MFI’s tend to be much more flexible than banks because they are not as demanding in paperwork, but on the other hand, they provide quicker money at typical interest rates of 120 percent per annum. This is 4 times more than the worst bank interests rates on the market.

MFI’s usually want to know what the customer wants to use the money for and requests a short term and abbreviated business plan. MFI’s also require some security and will willingly take salary pay cheque remittances, moveable property such as cars and machinery, immoveable assets like houses and other forms of buildings or land, and any other income that can be reasonably proven.

MFI’s are generally more focused on the quality of the business plan to show capacity to pay back and often use some form of security to mitigate against possible default. MFI’s will typically respond to a customer s request within a few days and quick money is put on the table once the formalities have been addressed. The options for renegotiating the terms are limited and the MFI’s oversight in monitoring customer performance is imbedded in the lending agreement.

Many Zambian companies use this route to access quick finance and begin to develop an understanding of the rudiments of borrowing money and the necessary process that have to be undertaken. Many companies also recognize that the cost of money from MFI’s is too high for investment into plant and machinery or medium term programs because the interest rates will quickly outgrow the principal amount borrowed. MFI financing is therefore predominantly used for short term trading that covers not more than one month to keep the interest payments within the 30 percent bracket.

There are a good proportion of Zambians that consider the MFI’s too slow to release money and therefore look for an even faster mechanism to obtain quick money. These business people come out of the sunlight and go into the shadows to find a Money Lender typically known as a Loan Shark.The money lender will make quick money available at their low interest rates of 180 percent per annum, but predominantly offer loans at 365 percent per annum.

Money lenders generally offer quick money within 24 hours but require only a brief explanation about the use of the money and demand tangible security in the form of moveable and immoveable assets valued at typically three times the amount to be given in the quick loan request. The rationale is that a money lender becomes more comfortable that the customer will do everything in his or her power to pay back the loan before risking the loss of the pledged property that is three times more valuable than the loan taken. Clearly the motivation to pay back is based on the bigger loss that the customer would make if they defaulted.

Money lenders are not keen to renegotiate the terms of the loan agreement unless it makes substantially more profit for them. In addition, money lenders tend to secure the loan given with a sales agreement between the customer and the money lender for the property surrendered as security, but include a buy back clause that enables the customer to clear the debt owed and redeem ‘their’ property. This mechanism basically gets the customer to sell the property to the money lender, and the money lender is obliged to sell back the property (by way of cancelling and tearing up the sale agreement) to the customer when the customer pays back the principal with the accumulated interest.

The money lender therefore does not have to go through any litigation if the customer defaults on the loan agreement, but simply carry out the change of ownership process and liquidate the security to recover the money owed.

Money lenders provide the quickest cash in the financial markets, but the risks taken by the customer are higher than any other form of borrowing. Many people have lost homes, vehicles, farms, premises, and machinery because they did not meet the terms and conditions of borrowing quick money from the money lenders.

The lessons to be learned are that any quick money comes with heavy risks. The risk of heavy interest rates and the risk of losing the security pledged in order to obtain quick money is real, and it can be the recipe for a disastrous life thereafter.

Published 16 March 2010