The Development Bank of Namibia has warned the Small and Medium Enterprises (SMEs) to be careful when borrowing for effective assets and operations, as the economy begins to improve.
A media statement issued by DBN’s Head of Marketing and Corporate Communications, Jerome Mutumba, here on Monday said responsible borrowing takes into account the financing needs of the enterprise, but also considers the level of expenditure and the cost of financing.
The statement explained that most SME entrepreneurs set out to apply for finance with a high degree of confidence and certainty, however the results of the operation may fall short of expectations.
Therefore, these SMEs should follow the approach of larger enterprises and plan for finance in a conservative manner.
On the level of expenditure, the statement suggested that although the borrower might apply for finance for a newer or more expensive vehicle, a reliable and guaranteed older vehicle may be of as much utility as the new vehicle, however with a significant cost reduction.
The older vehicle should also be less of a risk in terms of financial burden in terms of repayment of the finance, it noted.
According to the statement, the repayment consists of two elements such as the repayment of the principal and repayment of the interest, noting that if the level of expenditure is lower, the monthly amount and interest may be lower. Alternatively, the duration of the loan may be shorter.
Both of these approaches have significant benefits for the enterprise, as greater profits are a result of the lower expenses of repayment of finance, either immediately if the lower amount is repaid for a longer duration or in the medium term when the repayment ceases earlier.