For a lot of people, debt is such a big and scary word. However, regardless of whether you are an individual or an enterprise, being fearful of debt is a good way to pass on an opportunity.
When you visit someone with a very nice house you will typically go “they have a lot of money!”; seldom will you think that they are deep in debt. But, in Kenya, real estate is very highly-priced. It would require you to have a lot of capital to get you a big house, especially in urban centres like Nairobi. Of course, most people do not have such huge amounts of money readily available to buy a home outright. They get help from financial institutions like a bank by applying for loans or a mortgage.
The saying that goes “you have to spend money to make money” is not meant for the already rich people. Finding alternative ways to get capital is critical to attaining the necessary leverage to make money in almost any venture. But you cannot disregard the literal meaning of the saying because, well, you cannot scale up the fortune ladder without sufficient resources at hand.
Many conservative-thinking people have trouble comprehending the true value of money, as they would like to minimize risks as much as possible; however, it wouldn’t be so wise to consider all debt as a bad thing.
Let’s look at how debt can be a healthy choice.
Think about how much money you need to buy a house. Saving up to make the purchase will take such a long time, and you’ll probably need a place to live much sooner than accumulating enough money. A financial commitment of a bond serves the purpose of getting you a foothold on the property ladder even though it takes a long time to repay and is expensive.
Furthermore, holding out on buying the house would just make you incur other expenses like paying your rent which would reduce further your chances or potential to save every month. Yes taking on debt to buy a property would cost you more in interest and fees, but it still pushes it more in the good-debt category.
“After I got married in 2002, I needed to look for my own place. I found pieces of land in Tassia going for as cheap as Ksh150,000. I took a loan and was able to set up a nice house I can stay in rent-free”, says Danson Okelo, a dealer in real estate while recounting how he started.
“Unfortunately for a few friends of mine who were afraid of taking loans opting to go for the slower process of saving. They have had to buy their pieces of land at Ksh2.5 million in the same area. And the prices of land just keeps on growing. Never comes down”
Danson remains glad to have taken the loan for his development.
“We wouldn’t have been where we are now had we not taken the loan and committed to paying it. It has saved us a lot of money and time. I think the decision we took has been essential and ultimately, we have made much more money than the loan we took from the bank since property prices have been increasing.”
When it comes to purchasing property, it is best to do it sooner rather than later. Embracing good debt facilitates this capability.
There are purchases that when made may cost money right now, but will eventually let you save or even make money later on. For instance, when you borrow money to upgrade your household or to maintain it, you may realize a return on your investment after a few years, and maybe a reduction in household costs in the future.
“Right now my husband and I are considering doing some renovations for our house. We have never made any improvements to it for the last 12 years since we started living in it. The kitchen and bathroom are starting to look very aged.” Says Stella Njiru, a resident in Ruai.
“We have also realized that if we ever want to sell or rent out we would make much more of a return financially if we renovated the property. This would be to make our home much more appealing to potential buyers or tenants.”, she continues.
“We would like to set up an open-plan kitchen, same goes for the living room, upgrade the bathroom, plus an entertainment area would be great!”
She however acknowledges the costs of their project would not be so low.
“After thinking about this for months and getting quotations here and there, we have realized we need a lot of money for this. I have to go to the bank to see how much money they would offer me. The goal is to cash in later after renovating”
Courses offered in Kenyan educational institutions can be expensive. Taking one that requires money you currently do not have can be a bit stressful, but in such a case, good debt is required. If you are sure of the career path you are going for, then you’ll cover the debt with no problem.
Ensure you have done your research so you know that the debt you are incurring now will give back a return on increased income or better job opportunities when you have completed your studies.
You can use the money acquired through debt to buy inventory or stock, hire more workers and increase your marketing. Taking a low-interest, long-term debt can facilitate your company with the working capital required to run smoothly and profitably all year round. Consider it as the difference of going that extra mile in your business and making more profits, instead of being tied down to a cash-strapped venture that may never take off.
If you have a business and you would like to remain in complete control of the business, but do not have sufficient funds to start, consider taking a small business loan.
Having a business plan, an expense sheet, and financial projections for the next couple of years would give you a better idea of how much you need to ask for and might increase your chances to secure a loan.
Unexpected events pop up from time to time and they vary from visiting a doctor to house damage. And these emergencies vary from person to person. The point is that if it costs more than what you have then you need more money urgently. A quick loan will give you some room to breathe by making sure that the issue is resolved first quickly and the payment can be done after the emergency has been taken care of.
Now that you have known all these, debts are not so bad anymore, are they? Taking debt that will eventually improve an aspect or two in your life or a debt that will give you some return, in the end, are “good debts”.
You should not shy away from good debts as it will save you some time and probably more costs that could accrue if you waited.
The most important thing to do is to assess the situation you are in and ensure that the merits of taking debt outweigh the demerits.