Getting
loans from the bank is number one source of capital to finance your business.
In this article, I will outline and explain the general requirements needed for
a bank loan. Generally,
if you need a loan from your bank to help finance your existing or new
business, it is most likely your bank will require the following information:
1. Feasibility Report
Preparing a
good feasibility report is one of the most important steps you should take if
you need your banker to finance your proposed business. The same is true if you
are planning to expand your existing business, presenting a good feasibility
report to your banker will make a good impression and can facilitate your
getting a loan.
2. A clear
statement of the amount of the loan required
3. A clear
statement of the purpose of the loan
4. The
period or term of the loan
5. Your
feasibility report (if it’s a new enterprise or expansion of an existing one),
plus an authentic financial report of the performance of your business, if is
an already existing one.
6. Your
management background and competence: the bank is very much interested in
learning about your management background, business without competent
management background in business will run into trouble and the repayment of
the loan becomes difficult.
7. You
Repayment Arrangement: The bank will be keenly interested in knowing how you
plan to repay the loan. Hence, they will like to evaluate your cash flow
forecast. Remember the cash flow forecast or cash budget that we talked about
in the previous article.
8. Any
Security you can Pledge: Banks in general, and in Nigeria in particular, want
all sorts of security. You are advised to find out from your account officer
what kind of security will be required before filling your proposal.
More Details on Bank Security
Banks
generally prefer a security that can be quickly turned into cash. Examples of
such securities are Government Bonds, Share Certificates and insurance
policies. Other kinds of securities that can be pledged to a bank are equipment,
real estate like building, and any other property of value.
The examples
given above do not exhaust the list of securities that can be offered to your
bank to enable you obtain a loan for business. Likewise, the list does not
exhaust all options open to a borrower in obtaining a loan. You may still be
able to obtain a loan even without security, if you can get a guarantor
acceptable to the bank. Members of your family, friends and relations can also
be of assistance in raising loans for you. You can also raise finance through
the popular esusu or through thrift and co-operative societies.
It is not
likely, however, that any financial institution will be willing to provide more
than two-thirds of the cost of your proposed project. In other words, banks and
other financiers watch the debt-equity ratio in appropriate cases in deciding
whether to approve a loan or deny it.
Why banks insist on high credit standards.
Banks
usually require high credit standards in order to be able to get back their
money. They do not actually own the monies they lend to borrowers. They give
from the monies deposited with them by other customers, meaning that they are
entrusted with public money. A bank or any other financial institution acting in
this capacity of trust must, therefore, jealously guard the money so entrusted
to it, if it must maintain its reputation.
Banks in
Nigeria are under the supervision of the Central Bank of Nigeria (CBN). Thus, a
banker’s decision on a loan application will be influenced by the following
factors:
1.
Government Policy
2. Bank
Policy
3 Customer’s
Interest
Government Policy:
The
Government regulates the activities of banks in this country through the
Banking Act of 1969 and the Banks and Other Financial institutions Decree of
1991. Apart from regulating, the Government implements the economic and
industrial policies of the country. Besides) banks in Nigeria must comply with
the relevant provisions of the Companies & Allied Matters Decree, 1990 and
operate within its framework. In the final analysis) Government is the
regulator of the economic and financial system of the country.
Agriculture
receives the highest priority, followed by the manufacturing and construction
industries. In giving loans, therefore, banks have to reflect Government policy
as contained in the Central Bank guidelines. This is so because the CBN acts as
Government agent in the implementation of Government directives and regulation
of the banks.
Bank Policy:
Each bank
has its guidelines on lending by which it guides its lending department. Such
guidelines must, of course, be consistent with the Central Bank guidelines.
Each bank evaluates the loan application, taking into consideration the
standing of the customer and his past performance, the purpose and amount of
the loan, the period and the source of repayment.
The purpose
of the loan must be acceptable and the amount sought must be reasonable. No
bank will be willing to finance the whole cost of a project. The borrower must
have a stake in the business by also risking his own money in the project. The
period by which the money will be repaid must be quite reasonable and the
source of repayment must be certain. This is where your feasibility report and
the past financial performance of your business become’ particularly useful. A
business should repay its debts out of it profits.
Customer’s Interest:
Sometimes a
customer may be denied a loan or an advance in his own interest. It is common
for a customer to be overly optimistic about the profitability of his project
by under-estimating the possible difficulties he might encounter As a result of
these considerations, the banker tries to make sure the loan request is viable
and not one that will land the customer in disaster and make repayment
difficult or impossible.
Bearing all
the preceding considerations in mind the bank subjects your feasibility report
to the following appraisals:
(1) Market Analysis Appraisal
Here he
wants to make sure that proper market research was done and that there is a
market for your product or service.
(2) Technical Appraisal
Here the
banker wants to be sure that the production technology or process is feasible
and that adequate technical arrangements have been made to ensure a successful
implementation of the project.
(3) Managerial Appraisal
Here the
bank tries to satisfy himself that the management team is competent.
(4) Commercial Appraisal
In
evaluating the commercial arrangement in your proposal, the bank evaluates your
marketing plan to be sure that you have made proper arrangement for the
marketing of the product or service, and that adequate arrangement has been
made for a steady supply of raw materials where relevant.
(5) Financial Appraisal
Under this
heading the bank evaluates your financial projections or forecasts, not only to
ascertain their accuracy but also to determine the profitability of the
project. He also wants to determine whether adequate arrangements have been
made for financing the project and that there is a proper balance between debt
(borrowed capital) and equity (owner’s capital).
(6) Economic Appraisal
The bank
would also like to determine what contribution your project will be making to
the economy in terms of saving foreign exchange and employment generation.
(7) Legal Appraisal
The legal
department of the bank would like to make sure that your business is in
accordance with the Nigerian law, particularly if it is a joint venture.
You can see
from the above the importance of your doing a good feasibility study before
submitting your loan application to your banker.
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