Dear Entrepreneur,
As a business owner, you may require funds for variety of purposes ranging from, covering unexpected expenses to purchasing new equipment or funding expansion projects. Business loans from Commercial Banks are a popular option for entrepreneurs looking for financing, but it’s vital to consider all the ramifications before choosing this route to prevent sometimes devastating results. This informs our article this week which brings to light some important elements of getting a bank loan in Nigeria.
Factors To Consider Before Taking A Bank Loan
Why Do You Need A Loan: This crucial inquiry serves as the foundation for the Bank’s decision to accept or reject your loan application. You must be clear about why you require the loan and how receiving it will result in profits that will be applied to the facility’s repayment. Usually, the need is inferred from a business plan that describes the current state of your company, your financial needs and the effects of addressing those needs on your company.
How Much Do You Actually Need: This question flows from the above and is something most people fail to give due consideration at the point of getting the loan. Once you identify what you need the money for, the next question is how much do you actually need. Theres no use borrowing below what you need as it would not meet your need. At the same time borrowing excess will only lead to waste and higher interest accrual.
Capacity To Repay: Many borrowers focus on their needs and pay scant attention to how the loan will be repaid. Its very crucial to have a solid repayment at the point of taking the facility e.g you must decide whether you can accommodate weekly or monthly repayments which will assist you in selecting a loan with favorable payment conditions.
Understand The Terms: Many people have gotten into trouble because they did not pay proper attention to the terms of the loan agreement. Rushing to sign any agreement is never a good idea and in the case of a loan agreement it very important to pay attention to the fine print and get a professional e.g. a lawyer to make things clearer.
Types Of Bank Loans
There are two broadly two types of Bank loans:
- Secured Loan: A secured loan is one in which the borrower pledges assets (such as property or movable assets, etc.) as loan collateral. The assets are always worth more than the loan amount, which can be claimed by the lender if the borrower fails to return the funds in accordance with the terms and conditions agreed upon. Secured loans include term loan, mortgage loan
- Unsecured Loan: An unsecured loan is one in which the borrower does not put up any collateral for the loan. Because lenders face greater risks with this type of loan, the interest rate is higher. Examples include credit card loan, personal/consumer loan.
Key Terminologies
- Principal- The total sum of money you borrowed from the Bank.
- Interest- The interest rate is the amount a lender charges a borrower and is typically a percentage of the loan amount. Interest is usually computed on a yearly basis.
- Collateral- This is the asset that you pledged to the Bank to secure the loan. Common types of collateral include real estate, vehicles, cash and investments
- Loan Term (Or Tenor)- The period over which a loan agreement is in effect. It is expected that the Borrower is able to pay back the loan and interest within this period.
- Maturity- Maturity is the final due date in which you must pay your loan off in full.
- Default- A failure to fulfil the obligation of repaying the loan.
General Requirements For Obtaining A Bank Loan In Nigeria
Before you can be eligible to obtain a business loan from any Bank in Nigeria, the following requirements must be met:
- Corporate Account: This is a fundamental requirement, a business loan applicant must have a registered company which has opened an account with the lender. Some Bank have specific period in which borrowers should have operated the account.
- Clean Credit history: The business owner who wishes to obtain a loan from the bank, must have good credit history and must not be in default of any loan. Your credit history can be easily checked with any of the Credit Bureaus.
- Must Have Good Cash Flow: In other to be considered by the bank for a loan, you must have a steady and stable cash flow which can be easily determined by checking your bank account statement.
Parting Thoughts.
There is no denying the fact that loans have been successful in advancing business’s overall development, on another note it has also destroyed a lot of businesses due to improper planning or use of the loan. As highlighted in this article it is important to give due consideration to your business needs and repayment strategy before even deciding to take the loan. Its also important for borrowers to carefully read and understand the terms and conditions of the loan being offered. Finally its important to avoid unlicensed borrowers (loan sharks) who charge exorbitant interest rates and can make life unbearable for the business owner
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