“Nigerian business is booming”, “Nigerian business is growing”, these are comments you will see daily in international news, or in any Nigerian news portal. But then, on the other hand, I get asked by a lot of Nigerian entrepreneurs – “Why won’t banks finance my business idea?” or “How can I get funding from Nigerian banks for my business?” And “Is the banking business culture in Nigeria different?” It’s simple – your business must be attractive, secure and demonstrating growth. The only way to show this is by keeping accurate and auditable records of your expenditure, operational activity and sales. One myth that I’d like to dismiss is that banks fund new businesses. Banks very rarely invest in, or loan money to, start-up businesses. But they do fund small businesses with operating history. Would you want your bank putting your money at risk, by investing your savings in new risky business ventures with no track record?
This humorous comment is harsh, but true:
“A bank is a place that will lend you money if you can prove that you don’t need It.” – Bob Hope
Why then did I say that banks do fund small business? If you’re business has been around for a few years it has enough history, projected business, stability and assets that can all serve as collateral. Once you have this structure in place a bank is more likely to award you a loan against your business, or personal collateral, such as home, car or savings.
Like you, a bank is a business, and they will ensure that they are protected from potential risk when lending to customers. Your personal savings should be the primary source of funding for your business. If you haven’t started already, start saving, launch your business, and demonstrate that it is secure. Then you can approach banks for a loan
Nigerian banking is no different to other banking services around the world. The Nigerian industry approves loans based on statistics or information available to them as required by the Central Bank of Nigeria (CBN). These statistics determine your risk to the bank, therefore calculating how much you can borrow, for how long and the interest rates you will be charged
How Much Money Do You Need?
Be accurate in your estimation of what you need. What you want, what you need, and what you expect to receive are three separate values. This is not your opportunity to ask for ₦1,000,000 when you only need ₦70,000. The exact amount needed should be be clearly evidenced in your business plan. Refer back to your business plan, and answer the following question, which the bank will definitely ask you:
What will the money be spent on?
• Buying supplies and inventory
• Paying staff and suppliers
• Equipment and machinery
• Office equipment
• Marketing your business
• Purchasing/acquiring the business from it’s current owner
Limit the amount of huge payments you make when purchasing such items, or services. A business needs moving cash, and cash reserves to survive. If you pay big lump sums you are leaving your business vulnerable. Observe the suppliers payment terms. If the invoice states that payment is expected 30 days after invoice, then pay as late as possible. Don’t pay cash upfront if it is not necessary, and don’t be afraid to rent or lease certain items. This is common practice in today’s business environment
Next, identify what you own that can be used as collateral for your loans, because your bank will ask this question. The assets of your business or your personal assets, or both, can act as collateral, and secure most small business loans.
Some credit, such as credit cards can be granted on an unsecured basis. Unsecured means a loan not backed by any underlying asset or collateral. Examples of unsecured are:
• Credit cards
• Personal lines of credit
• Charge card
• Friends or relatives
• Utility bill
• Medical bills
Secured loan means that underlying assets or collateral back the loan. This protects the lender if you are unable to keep up with payments. Examples of secured loans are:
• Computer loan
• Home mortgage
• Car loan or lease
• Construction loan
• Business loan
The amount you will receive, and terms of your loan will be determined by:
• Number of years in business – This is your track record and is very important. The amount of years required can very in each bank. The industry standard is usually between two to three years.
• Size of your company and the amount requested
How to Get the Money
Know what your lender wants. Ask them if you are unsure. For a business loan, the most common things a lender needs to see are:
• Business financial statements
• Business tax returns
• Business Plan with budget or projection
• Personal financial statements
• Personal tax returns
Be prepared to answer difficult questions about your business. Remember, this is an interview, and like any other interview be ready to highlight your performance both in the past and in the future. You are there to impress, and convince them that you are a safe investment.
Fully understand why you need the money, and be confident in explaining why, because you will be asked. “Because I need the money,” does not demonstrate the characteristics of a trustworthy businessperson.
Other things to consider:
• Dress smart when attending meetings at the bank. I can’t stress this point hard enough. This is an interview, so arrive as if you are attending an interview.
• Make sure your business plan is up to date, and looking presentable.
• Communication is key, if at any point you run in to difficulty and cannot make a payment. Make sure you contact the bank to let them know. Offer them a solution or plan for immediate payment.
• Be prepared to discuss any prior credit issues/problems.
• Be realistic when discussing your business plan and vision. Banks deal with facts, and figures. They don’t want to hear how you plan to take over the world. They just want to know when they will receive their money
Make sure that you are a good customer, and stick to what has been agreed. This will ensure that the lender is flexible if you have any difficulties, and if you need to borrow again in the future it will be granted. More importantly, you are contractually obliged to stick to what has been agreed, so any breaches of contract could lead to legal proceeding.