A COMPLETE GUIDE TO BUSINESS LENDING IN NIGERIA

As a business owner, you will need to lend at a certain point in your business in order increase your cash flow, make necessary purchases or to finance the expansion of your business to new horizons and new market places. There are various processes and applications one will need to follow before having access to these funding and in this article we will guide you through every one of them

WHAT LENDING OPTIONS CAN YOU CHOOSE FROM?

There are different lending options that are available to business organizations that are seeking funding. As a business owner you will have to choose the one that suits your business needs. These lending options includes Loans, Overdrafts, Invoice Finance, Asset Finance

• Business Loans

These are one of the most commons of lending that have been adopted by various businesses. Business loans is borrowing a particular sum of money for a period of time which is payable with interest. There are secured loans and unsecured loans. The secured loans make use of collateral security while the unsecured doesn’t. You must ensure that you go through the loan agreement and the terms and condition before agreeing to it

Merits of Business loans

1. Repaying the amount borrowed over a span of time aids in proper budgeting for the company
2. Certain loans can be very flexible because it depends on your specification
3. Loans can be used funding a wide array of needs

Demerits of Business loan

1. Collateral may be used as security in the case of default payment
2. Interest on loan must be fully paid

• Business overdraft

An overdraft gives you the access to have access to more money than what you have presently in your account when you don’t have enough funds in your account. It provides a credit facility to the business account holder. Bank overdrafts could also be unsecured or secured with a collateral as security in the case of a default payment

Merits

1. You will also make interest payment on the amount of money utilised
2. You can apply for a limit according to your specification
3. It allows to make continuous payment regardless of whether you have sufficient funds in your account or not

Demerits

1. It could come with some usage or annual fees payment
2. It is not suitable for long term borrowing, it can only be utilised and paid back within a short period of time
3. Overdraft rates will go up if the bank rates changes

• Invoice finance

This has to with transactions between business and invoicing in arrears. It allows you to have access to funds that are tied up in arrears invoices. The fund can be used to pay the employees or expand the business for better growth and opportunities. Invoice financing can be structured in the following ways

1. Factoring

This ensures that there is access to payments for products and services rendered. A certain percentage of the value of an invoice will be available upfront and when the invoice has be settled, the remaining outstanding amount will be made available to you. Although a small fee will be subtracted. Under factoring your customers are fully aware that you are utilising the service

2. Invoiced discounting

Invoice discounting works the same way factoring works except that your customers are not aware that you are using the service

3. Asset based lending

This allows your cash flow to have a strengthened position by releasing cash against the assets in the balance sheet such as plant and machinery, stock etc.

4. Debtor protection

This is a measure that is low in cost and can protect up to 90% of the value of your invoices in the case where your customers default in their payment.

Merits

1. Quickened access to cash that will aid in strengthening your cash flow
2. You can use the funds for a wide array of activities and payments
3. Increased flexibility

• Asset Finance

Asset finance gives you the ability to own an asset for a period of time through payment in bits over a period of time instead of making payment upfront. Asset finance consists of the following categories

1. Hire purchase

The amount that is used to purchase the asset will be spread over a period of time in order to help the company in proper budgeting. After the payment has been done, the full ownership will be yours

2. Equipment lease

This occurs when an asset is rented by your organization for a particular period of time. In the case when the asset is sold after the rent period has expired, the business will receive part of the amount for which the asset was sold

Merits

1. It gives room for investment without affecting the working capital
2. Aids in acquiring new equipment that will aid the business in their productivity

WHAT ARE CREDIT SCORES AND HOW CAN YOU BE ELIGIBLE

In the process of making an application for lending finance, the lenders will take a look the following:

• Your credit check in order to know how financial reliable your company is.
• They will also take a look at the credit history of those involved in the business (directors of the company).
• Your tax liabilities and whether fond of late payments
• How your current business account is managed
• Your business plan

The following elements can affect your credit score as a business

1. Company size
2. Trading history
3. Any debt attached to the company
4. Industry-specific risk factors

Having a good credit score is very necessary if you want to have access to loans

WHAT DO YOU NEED TO HAVE ACCESS TO BUSINESS LOANS IN NIGERIA

Before you have access to any loan funding from banks or investors, you will need provide some detailed information and certificates to support your loan application. You will be asked to provide the following documents

1. Business bank statements
2. A well detailed business plan
3. Availability of Collateral
4. Certificate of incorporation
5. Personal bank statements
6. Tax returns
7. Insurance information
8. Agreement on future ratios
9. Complete details of account payables
10. Complete details of account receivables
11. Audited financial statements
12. Forecast of your cash flow
13. Details of any business and personal assets, including properties, equipment, stock, vehicles and saving
14. Details of liabilities such as loans and hire purchase agreements.
15. Details of your income from your business and any other sources of earnings or benefits that you receive

This information may be considered as a lot but it is very important for those giving you the finance to have enough information for their decision making

THINGS YOU NEED TO KNOW BEFORE APPLYING FOR A BANK LOAN IN NIGERIA

There are some things that you need to take note of before applying for loan in Nigeria. They include the following

1. A formal application

When you want to apply for a loan in any of the banks in Nigeria, you will need to make a formal application to the bank and they commonly ask for your business plan

2. Interest rates

Banks charge interest rate on a per annum basis and the rates are not fixed. They do not charge interest on a monthly basis but on a yearly basis. Banks can also change the interest rate at any time they feel that it is required to the conditions of the market. And different banks offer different rates and also terms of conditions.

3. Take note of the terms and conditions

When the lender gives you an offer letter, it consists of certain terms and conditions that must be thoroughly read through before accepting the agreement. These conditions consists of the interest rate, repayment period, collateral and other relevant information that must be checked properly.

4. Collateral

Banks will also ask for collateral as a form of security when lending out the money to you. The collateral could be in the form of an asset, a personal guarantee, a property or a land.

5. Failing to make repayments of the loan as at when due doesn’t mean your business will be taken over

Most banks like to avoid the use of legal action. And as a business owner it is better for you to make a part payment of the loan than not paying at all because they want to see you succeed. Whenever you fail to make the appropriate payment at the right time, you can renew your contract with the bank by approaching them

6. You can refinance or restructure your loan at any point with the bank

You can proceed to refinance your loan by approaching another bank to take over your existing money or restructure your loan if you think that the terms agreed are not favourable to your business. Refinancing of loans should only be considered when the new banks makes an offer that is better than the previous terms and conditions that was set with the old bank

7. There is moratorium available for you

A moratorium occurs when the bank or lender gives access to a borrower to extend the repayment of principal for a period of time. The bank will give you some time in order not to burden you with high cash outflows. This period is granted by banks in Nigeria and it occurs for more than a month depending on the specification of the borrower or the agreement between both parties

8. There are other charges too

Banks have some hidden charges apart from the interest rate on loans. They also charge fees and Commission on Turnover (COT)

9. Have a good business plan

Majority of the banks in Nigeria will ask for a well detailed business plan that will predict the growth of your business in 1 to 3 years. Having a detailed business plan will give you a head start in your request for a business loan

CONCLUSION

At a point every business organization will seek for external funding that will be used to cover expenses of the firm, repay debts and also for the expansion of the business.  There are various means of business lending that a business owner has access to it and the choice you will make will depend on your business size, industry and your specifications. The complete guide to Business Lending in Nigeria will give you an idea of how you can acquire financing for your business in Nigeria.

About the author

Onamakinde Dare Daniel is a highly motivated accountant with knowledge in Accounting, Taxation, Management, Audit, Costing and Research. He is keen on tax matters due to its ever dynamic nature.

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