Do you know that as a business owner, you have multiple options for lending money from an external source? You can lend money via loans, overdrafts, asset financing, and invoice financing. However for the purpose of our discussion here, our focus is on getting access to business loans. We will be presenting to you a fairly comprehensive guide to securing a business loan in Nigeria in this article.
You might wish to expand your business, handle critical operations, or even buy valuable equipment which your personal funds cannot cover. To that end, you will usually reach a point where lending money from other funding sources becomes critical.
We urge our readers to investigate the aforementioned lending options (loans, overdrafts, asset finance, and invoice finance) to discover their usefulness. Nevertheless, business loans are highly popular; so you need to know the requirements for securing loans and where to obtain them in Nigeria.
Facts About Business Loans in Nigeria
- Application for a loan: Naturally, you are expected to submit a formal application to a lender (whether bank or non-bank) in order to access a business loan. That would usually be in the form of a filled form (though it may be a written application as well). Your reasons for requesting the loan should also be made clear.
- Credit score: Your business and personal credit scores will be checked by the lender before ever offering you a loan. If you have patronized online lenders before, you should be a bit familiar with the process. Your credit score is a measure of your credit worthiness – that is, your level of reliability in paying back a loan. To determine your credit score, your history with past lenders (along with that of business partners if any) will be checked. Again your tax payment history, how you manage your business account, and if you paid your past loans on time (or not) will be checked.
- Moratorium: Moratorium is the initial period of grace within which you are not required to start paying back the loan. As a business owner, it makes sense for the lender to grant you a few months to utilize the loan and bring forth returns. And in some cases, the grace period may be extended on request by the borrower. This is a critical period to consolidate your business and put in your best effort. Most surely you do not want to pay back a loan while running a loss, or your business has not found its footing. So be sure to utilize this grace period optimally to achieve results.
- Interest Rates: Examine the interest rate on the loan offered to you (along with the conditions of payment). They are normally calculated on an annual basis (not monthly), and different banks offer different interest rates (and conditions) on loans. Again take note that these rates can be changed at any time the lender deems it necessary. As a wise borrower, you can as well make your own calculations and plan ahead of time, before accepting the loan. Determine if you can handle the loan repayment terms before ever embarking on it.
- Loan terms and conditions: When the lender decides to offer you a loan, you will be given an offer letter. The full terms and conditions of the loan will be clearly stated therein. That should include the payment period, monthly installmental payments and due date, lending rate, penalty for default or late payment, and more. It is critical for you to read and understand all these conditions (and ask questions for clarity) before ever accepting the loan.
- Collateral: You will be required to provide a collateral as a security deposit that can substitute for the loan. Your collateral should have a high enough value and be worth selling in replacement of your loan, if you default on payment. Common assets such as land, house, stocks, machinery/equipment or certificates may be considered as valuable collateral.
- Late payments: There is an attendant penalty (or fine) you must pay for deferring your monthly loan repayments. The worst case scenario will be for the bank or lender to take legal action in order to recover their money. However, it does not have to end up this way. Neither does loan default automatically expose you to the risk of your business being taken over by the lender. You might not have been able to pay your loan fully within the stipulated time for an unavoidable reason. By all means, you should approach the lender to renegotiate the loan terms.
- Guarantors: Of a certainty, you will be required to supply one or more guarantors as a surety that the loan will be paid back. Your guarantor must be someone trusted and well-known to you; and preferably a person of high net worth. Should in case you fail to pay the loan at any time, the lender would require the guarantor to assist you in paying up. Such a guarantor therefore must be willing to undertake that responsibility and as such, you must consult him/her and get his/her approval first.
- Restructuring or refinancing your loan: As we explained under loan repayments, you can renegotiate the terms covering your loan with the lender. This is recommended in a case where the present loan terms do not favor you. You can also apply to another bank to help you refinance a loan (by paying it off). This can work if the other bank offers better loan conditions.
Requirements for Securing a Business Loan in Nigeria
Most business lenders expect your business to be up and running for some years to consider you for a loan. And banks are prominent amongst these lenders (although you may also obtain loans from non-bank investors and lenders). The number of years during which your business has been operating is usually taken as a measure of your business stamina and success rate. The longer the time, the better your chances at getting a loan – especially from banks. Unless of course your business requires a startup seed (usually a grant; though it may also be a small or soft loan).
In any case, prepare yourself to meet the following essential conditions to access a business loan:
- A detailed business plan
- Business and personal bank statements
- Business and personal credit score
- Tax returns
- Certificate of Incorporation
- Business insurance details
- Valid means of identification
- Availability of Collateral
- Actively running business
- Audited financial statements
- Cash flow forecast
- Complete details of account payables and account receivables
- Details of all business and personal assets (e.g. equipment, properties, vehicles, stock, and savings)
- Details of liabilities (e.g. other loans, or hire purchase agreements)
- Details of your business and personal income (from all existing sources)
- Agreement on future ratios
The list may appear quite hefty. But these details are required because sincerely, no lender wants to lose his/her money to an unserious business owner.
Summary
There are various lending options available for you to finance your business in Nigeria. They are not limited to business loans alone, as we have pointed out at the beginning. We urge you to explore them and find out which ones work for your type (and size) of business. We have also given you a clear picture of what is required of you to borrow a business loan in Nigeria. Having these at the back of your mind will help you prepare ahead for that time when you will need such a loan.
