SAfety Nets

 Just like big companies, they have reserves which cover them in the event that they incur a loss like the general reserve. So a general reserve is a good example of a safety net. Provisions are also put in place for other related events. A borrower is not an exception to this and they need a safety net in case they face challenges when a loan instalment is due. For borrowers, safety nets are usually in form of prepayments. The following ways can be adopted by clients to make sure that their TRPs (timely repayments are satisfactory).

     

    a.) Over paid instalments

    Sometimes entrepreneurs do experience high sales in some months than others or they get an order which makes them realize sales higher than normal and as a result they have excess cash. If they have excess cash and don’t have a purpose for such funds or are anticipating bad months ahead, it is better to create a safety net by paying an extra amount on top of the normal loan instalment. This will reduce the amount of the loan instalment when the next instalment falls due. The extra amount overpaid will act as a safety net in the month when the borrower is experiencing hardships as they will just the difference from the overpaid instalment and the normal loan instalment. It’s still acceptable even if the extra amount is high enough to cover a full instalment.

    b.) Reduce loan repayment period

    some borrowers find it hard to pay a lump sum loan  repayment to the lender (VIRL) especially if they experience emergencies such as sickness or death of a dependant etc. In order for them not to put themselves into a corner and experience unnecessary pressure and stress when a loan instalment falls due, they may make use of VIRL’s biller code for convenience or other ways of loans repayment by paying small amounts every week or every two weeks before they fall due. However, this is mainly encouraged if the business has excess idle cash or has enough cash inflow to run it without difficulty or liquidity challenges. The small amounts paid before the loan instalment falls due become a safety net.

    c.) Aligning loan repayment timing to the cash conversion cycle (most liquid form)

    Depending on the type of business, some business are most liquid (hold more cash) in certain days of the month i.e. first week of the month or last week of the month etc. A borrower may reduce the risk of failing to pay by talking to a loan officer and align the preferred loan repayment date to the day of the month that they are most likely to be holding cash. This alignment depends on one’s ability in understanding their business’ cash conversion cycle (CCC). Understanding this cycle will help the borrower to make sure that as they convert cash to stock and back to cash, they make sure that they can even make a prepayment if there is likelihood that loan repayment date is not aligned to a time when they are most liquid, thereby creating a safety net.