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To Borrow Or Not To Borrow

The loan profile should never be more than 50 per cent of the value of one’s assets, whether it is a term loan or a credit limit

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Though we have been running a successful entrepreneurial venture for the past 10 years, the subject of borrowing capital has always been a burning issue every time we discuss financial planning and upscaling our business. We are into the milk product manufacturing trade, which is highly capital intensive, both in terms of assets and working capital. The trade is also extremely fast-moving in nature, and requires a high degree of financial discipline and planning.

My family was in the business of manufacturing chewing tobacco. This is a low-turnover, high-profit business requiring very basic machinery and equipment. We were always told to stay away from high-risk sectors and also from taking karz (borrowing). As luck would have it, we landed in the highest-risk sector at that time, which was so capital-intensive that the promoter could not afford it.

So, we started out by putting in minimal resources without borrowing from any external sources. We reopened the milk powder manufacturing unit and began to do a basic renovation. This unit was something my father had bought as a real estate investment. By God’s grace, we earned handsome profits in the first year of operation and recovered the amount that we had invested. This encouraged us to go for capacity enhancement, which required some good amount of money. But being as conservative as we were, we dug into the family resources for this project. In the past, we had refrained from going into the high-risk business and stayed away from manufacturing perishable goods. However, bit by the entrepreneurial bug, we thought of going full throttle on the fresh milk business, which obviously required additional capital. And this was not possible without getting the forbidden karz. We took the plunge and borrowed money, and today we are a successful company with a CAGR of more than 30%. In 2015, the company achieved a turnover of $56 million, and it is now on track to breach $76 million in 2016, which represents a 38% growth year over year. This would not have been possible without the borrowing, and this borrowing has also grown with the growth of our business.

That brings us to the main question: How much should one borrow? I believe in the saying: “Debt is a trap.” Henceforth, before getting into this trap, the way out should always be clear. Even the most seasoned crusaders fail because of over confidence.

We have been conservative in our approach, and we consider that to be a big reason for our success.

To begin with, the loan profile should never be more than 50 percent of the value of one’s assets, whether it is a term loan or a credit limit. Even this requires a good amount of discipline. Subject matter experts should not take a moratorium of more than six months and should always be ready with a repayment plan before even borrowing the money. The longer one holds on to a loan, the deeper one falls into the trap. So, if one wants to go for an expansion, look at bringing in partners (strategic investors, equity partners, relatives, etc.), rather than loading one’s company with an excessive interest burden. It is better to use the money for the growth of the company than to give a part of the hard-earned income back to the bank. Surely, the next level of growth will then come through “investors” instead of coming from the “lenders.”

Jai Agarwal is the Managing Director of CP Milk & Food Products. In 2005, he started a manufacturing unit of dairy products with a turnover of $2.6 million in the first year and became the second-highest selling brand in the region within one year. As a member of the Entrepreneurs’ Organization’s (EO) Uttar Pradesh Chapter, Agarwal has attended various EO learning events in the Chapter and across the South Asia region, which have been instrumental in providing insights on financial planning and more, in his business. With EO’s support, Agarwal was able to prevent unhealthy situations in his trade, while considering his business brand as an independent property and how it should be valued.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Jai Agarwal

Jai Agarwal is the Managing Director, CP Milk & Food Products. In 2005, he started a manufacturing unit of dairy products with a turnover of $2.6 million in the first year and became the second highest selling brand in the region within one year. As part of the Aces forum, I have attended learning events and RIE in New Delhi. These events have been instrumental in providing insights on financial planning in my business. After listening to various leaders during the forums, I have started considering my brand as an independent property and how it should be valued. The family business workshops have helped me to prevent unhealthy situations in the trade. EO is now an intrinsic part of my thought process with which I conduct my business.

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