Learning to Manage a Loan

Today we’re going to hear the story of a woman who received a loan to start a small business selling rice. During the program we will hear from the woman, Adina, and also from the loan officer who helped Adina get her loan.

SOUND EFFECTS: RURAL SOUNDS (livestock, market, etc.)

Hello. I’m Adina. I’m 28 years old. I’m married with four children. My husband and I work as labourers on a large rice farm down the road. About a year ago I started thinking that I would like to grow my own rice and sell it – in other words start my own small business. Of course I could also use some of the rice to feed my family. We would be more self sufficient. Rice is an important crop for us. There was a small piece of land available at my mother’s house. But I didn’t have money to buy the seed. I applied for a loan from a small bank that lends money to very small businesses.

I would like to share my story with you. I really didn’t know much about borrowing money when I first started. It wasn’t as easy as I expected.

As I said, I wanted to grow rice. Seed is expensive and that’s what I needed the loan for. I talked to my husband about it. At the beginning he didn’t seem interested, but then he started asking me more details about how much money I could borrow and things like that. Finally he agreed. I calculated that I would need 50 dollars to buy enough seed to plant the field beside my mother’s house. My husband said that I should ask for more than that so that we could buy some clothing and things for the house. I didn’t think there was anything wrong with that so I asked for a loan of 100 dollars.

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SOUND EFFECTS: OFFICE SOUNDS (typewriter, other office equipment).

When Adina came to me she wanted to borrow 100 dollars.

She told me she wanted to start a small business growing and selling rice. She needed the money to buy rice seed. She wanted to plant a lot of rice.

She didn’t know the term of the loan she wanted but I helped her work it out. I asked her how long it would take from the time she bought the seed to the time all her rice was sold at the market. In other words, how long did she think it would take to earn all the profit on her 100 dollar investment. Once she had sold all the rice she had planted she would have enough money to pay back the loan, and keep some for herself.

At that time she could apply for another loan if she wanted to plant more rice. She said that four months would give her enough time to plant, harvest and sell the rice. So I said she would need a four month loan.

She would have to pay back the money after four months. She would also have to pay the cost of borrowing the money by making small payments every month. We call that cost the “interest” on the loan.

SOUND EFFECTS: RURAL SOUNDS

My loan application was accepted. I received 100 dollars. I was given a term of four months. That meant I had to pay back the loan in four months. In four months I hoped I could sell all my rice so I could repay the loan. I was very happy.

When I received the money my husband said we should use the money to buy some new clothes and maybe some furniture. But now I didn’t agree. I thought we should just go out and buy the rice seed. We argued. Finally I said okay because I didn’t want to argue and I wanted to get the money. I also knew that I had taken out more than I needed for my expenses.

My husband went out and bought some clothes and other things – I’m not sure what. He spent 50 dollars.

Then I went to town and I bought 50 dollars worth of seed. Together my family and I planted the seed. After four months my loan payment was due. I had harvested the rice but I had not sold it yet. It would probably take me another month to sell it. When I tried to gather together the money to repay the loan I didn’t have enough. And I realized that even if I had sold all my rice I still wouldn’t have made enough money to repay the loan. Now we were in a very bad situation. We had less money and were more in debt that before I got the loan. I was crying a lot.

Can you identify the mistakes that Adina made? The loan officer can tell us how some of the problems could have been avoided.

SOUND EFFECTS: OFFICE SOUNDS

When Adina came to visit me again she said she couldn’t make the loan payment. After I heard her story I realized that there were two main reasons for this. First, she did not invest all of the loan money in her business. She bought some things to please her husband, so there was a conflict there. That was one of the problems. And because she only invested half of the loan money in her business she only earned a profit on that half and not on the full 100 dollars she borrowed.

The payment she needed to make was based on the 100 dollars.

The second reason she was in trouble was that she misjudged the amount of time it would take her to grow and sell the rice. This time period is known as her business cycle. She did not calculate it correctly. So after four months it was time to pay back the loan. But she hadn’t sold all her rice so she didn’t have enough money to repay the bank.

From the point of view of the bank she was now a bad risk as a borrower. It would be difficult for her to get another loan from our organization.

SOUND EFFECTS: RURAL SOUNDS

For a while I felt that my life was ruined. The things my husband bought when we first got the money were not helping to feed my family. I learned some valuable lessons. One was that my husband and I should have been in agreement at the beginning. I needed him to trust my decisions and respect them before I accepted the loan. He should have allowed me to manage the loan. We both understand this now. After all it was my business – I could manage it, and I had some good ideas. His reasons for wanting the money were different from mine. He wanted the money to buy things for the house while I wanted the money to start a business. The second thing was that I should not have taken more money than I needed for my business because I did not invest that other 50 dollars and make a profit on it.

Also, I didn’t understand what they call my business cycle. I wasn’t sure how long it would take me to harvest and sell my rice, so I didn’t know when I would have the cash to repay the loan.

For all these reasons I couldn’t pay back the money. Now I am more in debt than before I started. The bank called me a poor credit risk. And I may not be able to get another loan. But I learned from my mistakes. I won’t make them again if I do get a loan again some day.

There are good and bad ways of managing credit. To manage credit properly here are some things to remember. Number one, only borrow the amount that you need. Invest all of the loan money in your business and invest it as soon as possible. And know your business cycle – that’s the amount of time it will take you to make enough profit to repay the loan. If you understand this you can calculate properly when you will be able to make loan payments.