By Anayo M. Nwosu
My target audience in this write up are the young and upcoming business men and women who have their eyes set on greatness in business.
I have seen a lot in my banking career both as a branch manager in retail market locations, commercial and corporate banking postings.
I have also tried to avoid finance or banking jargon to make this message easily comprehensible.
Why you need to borrow
The sole purpose of borrowing is to augment or make up your existing capital available for your business.
Every business including a start-up (i.e a new business) is in a perpetual need of capital.
You can get capital through:
a) Personal savings
b) Financial assistance of relatives
c) Funds from lending agents like a bank for a fee, or
d) Contributions of invited shareholders.
Never should you start a business with capital borrowed from a bank or interest demanding lending agent. It is poisonous. Anyway, no commercial bank would lend a small business person money to start a business from the scratch.
Many small businesses complain and wish that they had more capital. Yes, you can get capital from the bank but like child’s delivery, it will start with pregnancy and it will take a period of preparation.
Preparation to securing your first bank loan
All the big businesses you know have borrowed and some are still heavily indebted to banks. A small business that wants to borrow from a bank must do the following:
1. You should immediately register and use a business name for your business activity. Consult a lawyer to help you register a company. You can also visit the nearest Corporate Affairs Commission to do the registration by yourself. Banks prefer lending to a business name not an individual name.
2. Record Keeping: You must maintain modern accounting books. There must be separate books to record daily sales, purchases with dates and amount, debtors and creditors with dates and amount, list of other assets including vehicles, chairs etc.; and most importantly, the book of expenses with dates and amount.
These records when compiled on a monthly, quarterly, half yearly and yearly basis tell a story of how well you have fared in managing your business. The records contain all the information your banker needs to make a loan decision.
You may need to get an Accounting graduate to help you put the books in place and train you on how to use them. It’s very important.
You can also computerise the book-keeping for speed and ease of analysis. You can get in touch with my friend Chioma Ifeanyi-Ezeh who sells affordable software on accounting book keeping for small businesses.
3. Maintain a current account: You should open a current account with the business name. Ask for the type of account that does not attract COT or Account Maintenance Fee.
It’s important that you route all your sales through this account to prove that you can generate enough turnover to repay a loan if given. Bankers like a business that generates turnover. It shows that your goods are sellable.
Note that the bank can only lend you not more than 50% of your turnover for a start and not more than 40% of your total equity or your own capital in the business.
4. Buy a land in the town: You should try and buy a land in the town and ensure that you process and get the Certificate of Occupancy (C of O) of the land or that you change the name on the C of O of the land you bought into your own name. An approval evidencing the change of ownership of a land title with a C of O is called Governor’s Consent.
If your land (even if you have a mansion on it) has neither a C of O nor Governor’s Consent, the banker will say that you have no title or legal ownership of the land. Meaning that your property has no collateral value. No bank lends against such land or property.
You should ensure that you build a small house on the land because government can revoke a title issued on an undeveloped land.
Finally, get an estate surveyor to give you an idea of the value of the land especially how much it would be sold if you are forced to sell it urgently. That is that forced sale value that matters to the banker not what you spent in buying the property or building the house on the land.
The bank can only lend you not more than 70 percent of the forced sale value of land.
Note that it is illegal for a banker to lend any borrower up to N50,000 without a tangible collateral. In fact, no bank can lend a dime without collateral since January 1, 2018.
Types of loans available for small businesses
The following are some of the loans available for a small business :
1. Lending Against Stock: Having observed your turnover as recorded in your bank account statement for a period not less than 6months, the banker could lend you an amount up to 50% of your total cash sales or turnover as evidenced in the account statement not in sales book or invoices.
You are required to pay down this loan within 30 days or the period it is believed that you can sell 50% of your new stock.
With this kind of loan, the banker visits you any day you fail to bring money to the bank. The goods are the collateral. He fears that you may have started diverting sales proceeds.
2. Distributorship Finance: On the recommendation of your supplier and validation of your turnover, the bank may decide to finance the procurement of goods for you by paying the invoice value directly to your suppliers. The bank shall only authorise your supplier to release goods in their warehouse to you only when you have lodged sales proceeds into your account with the bank.
The goods may also be stored in the bank’s controlled warehouse. You make sales and lodge in your account with the bank and you would be allowed to collect more goods.
Bank deducts their loan and leaves your profit in your account. This is the type of loan given to distributors of Nigeria Breweries, Telecoms, Guinness, Cement and Flour etc. Some banks have a scheme for this kind of loan.
3. Purchase of House and Vehicles
A bank can help you finance the purchase of a house if that house is also easily sellable by the bank should you default in repayment of the loan.
The bank can also repossess and sell off the vehicle it financed its purchase if there is any default in payment.
To qualify for this asset financing loan, the bank would have calculated how much profit you make from your business per month. If the 40% of your profit cannot service the loan, it will not be approved.
Note that turnover is not profit. There are high turnover businesses that have very slim profit margins eg Recharge Cards, Noodles and many fast moving consumer goods.
Types of businesses banks hardly support
There are certain businesses the banks hardly support. Some of them are:
1. Technological Goods: Imagine a bank that financed a consignment of typewriter just before computers became household items. Also consider what would have happened to a bank that financed the importation of radio cassettes at the advent of CDs and DVDs.
Because of the risk of obsolescence or financed item becoming outdated and unsellable, banks avoid risking depositors’ funds in financing technology related items.
2. Contraband: It is illegal for a bank to grant loan to a dealer on contraband. Once the goods are seized by Customs the bank loses. The bank may even be prosecuted or lose its licence for supporting criminal activity.
3. Perishables: Because the items may spoil and become unsellabe, the bank will not risk putting its money in a business that does not guarantee repayment of loan.
Loan attracting behaviours
Trained bankers watch out for certain character of a loan applicant besides proof of turnover and collateral.
I encourage managers reporting to me to subscribe to soft sell magazines to scoop for news about existing and possible loan customers.
A small business man trying to get a loan should cultivate the following attitudes:
1. Moderate lifestyle: A seasoned banker would never lend to a business person that lead a loose lifestyle; who doles money away at parties and clubs. He would think that you will also lavish borrowed money the same way.
2. Reputation of Meeting Obligations : Let it not be known or heard from your suppliers, colleagues and neighbours that you don’t meet up with your committed obligations. In fact, refusal to pay rent and association dues will disqualify your loan application.
3. Don’t Offer Gratification to Aid loan Approval: Though there are bad eggs in every profession but a good banker knows that your offer of a bribe to facilitate a loan approval is an indication that you might not repay the loan or that you are under pressure. It’s a red flag.
You could appreciate your banker during festive seasons or during special occasions like birth of new baby or bereavement.
Increasing your loan facility volume
Once you succeed in securing a loan from a bank, you should ensure that you do all you can to repay the loan.
If you establish a reputation of repaying your loan as at when due, the banker would even on his own suggest to increase your loan amount as your business increases.
Please note that you should ensure that you use your profit to buy more landed property and process their titles.
Legal Mortgage over a property located in an easily sellable place is a perfect collateral for bank loans in Nigeria.
Options for budding entrepreneurs
I overhear many young talented entrepreneurs complain about the refusal of commercial banks to learn them money to finance their dreams or projects. That won’t happen. The commercial banks will come in when you have started off and have demonstrable turnover to repay loans. Then you can get loans for expansion or to support your working capital.
Those in dire need of capital can visit Bank of Industry and other development finance institutions interested in helping new businesses.
From experience, 80% of new businesses die within few years of commencement while only less than 5% survive after 5 years.
You can see that borrowing from a bank to enhance your capital is an act that requires planning and consistent bankable behaviour.
With sustained good reputation, the banks would be strongly moved to finance your business or contracts up to 100% without equity contribution.
Banking and borrowing are not only for the rich. You can access a bank loan if only you are ready to start preparing today.
Rome was not built in a day.
Don’t forget that unlike in marriage where virginity is a virtue, evidence of having borrowed multiple times and repaid is more preferable than an inexperienced borrowed before.
If you need to borrow big in future, why not start borrowing small small now? If you do, you would be building up your credit rating.