Don't Divert Funds No Matter What

Whenever I ask a person the reason for seeking loan advances, whether short term facilities or long haul financing, most hesitate to say it, and end up giving a very strong purpose, but whose foundation will always be shaky on further probing. Until recently, banks would accept a one liner or statement on purpose of borrowing, but the trend seems to be changing. Now one has to provide a budget.

I remember vividly one time when I had a young client, very enthusiastic and enterprising. He was so promising that I could tell, if he kept that momentum, he would end up commanding a business empire running into million dollars in a few years. The stream of ideas was really encouraging, and one could tell the diversification, or rather investing in different business segments would lower his risks, hence build up a very strong foundation for expansion.

One year into our interaction, he brought this amazing request for an advance, for basically expanding his business as he quickly put it. As usual I did due diligence that involved appraising to check if cash flows were permissible. All this turned positive, since the daily cash sales were significantly on the higher side. And soon, after a number of opinions since the amount was substantial, he had the money in the account. I clearly remember how the rest of his business associates were celebrating with him, and prospects of the growth.

Immediately after this, he was away for two weeks. Unknown to me, he had a classic wedding, and thereafter the pleasantries that follow outside the country. The loan repayment obligations were alright at this point until a month later, he could not keep up with the demands on operational costs as well as bank’s commitments. At this point, I was not sure where to start with such a case, being very new in lending processes.

A lot of people find themselves in this situation. Diversion of funds has been sighted as the major cost of many people defaulting and unable to manage financial resources well. Sometimes it is intentional, other times, its emergent. In ill motivated cases, like the case above, one could borrow money or even take funds from the business to attend to initiatives that do not generate returns immediately. Diverting funds to social issues like wedding is very suicidal. Where there are loan commitments then, it means, the business is required to generate enough to sustain its operational needs, expansion requirements as well as honor those obligations. In most cases, it does not work.

Emergent cases also exist. These could be hospital bills, school fees or other family needs that have to be met. Besides, there are those times that one decides to divert money for purchase of property like land that will not immediately offer generated cash to keep the smooth stream. In both cases, one stifles the business by keeping its bud dry while watering other quarters.

I normally advise business people to steer clear of diversion, or even in personal finance plan well. It is amazing, many people do not believe when I tell them, there is nothing like emergencies in life. Hospital bills can be clearly taken care of through prior engagement through a medical cover for the family. School fees can be properly handled by saving in advance, and so all needs in life can be banked. Including a wedding!

So, what happens, when one gets caught up in this diversion monster? First, it is important to recognize that a mistake has happened, hence look for a solution. This acceptance is very important, because then one can start soliciting support with this in mind. Two, I find it prudent to relook at the business as a whole particularly for business people to see, what are the cash cows that could easily give hanging fruits and boost cash flows. This is particularly crucial since then the gaps can be easily handled. Thirdly, it is prudent also, to ensure income leakages are sealed and hence save more. Lastly, when all is done and no solution is forthcoming, to retain credibility and even credit rating, one may choose to dispose one asset and bridge the gap, hoping, then this would be a huge lesson to keep abreast always.

Have you been in a case of diversion of funds? How did you handle it? Share your thoughts in the comments below.

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Zak Syengo is the Senior Manager Marketing & Communications at Rafiki Microfinance Bank