Thursday, October 5, 2017 10:00AM / Margin
Many small business owners dread banks and have little to no relationship with bankers. They either see bankers as enemies, fraudsters, the group that does not want SME’s to be great or all of the above. The truth is while there is a lot of room for Bankers to improve their value proposition to SMEs, there is a lot SMEs can do to extract value from Nigerian Banks – especially in the area of funding. A Bank will not just release other customers’ money to you without some level of assurance of getting the money back. Before we move into the guidelines of getting banks to give you a loan, let’s see if you qualify for one.
Generally, Nigerian Banks use three major criteria to decide whether to give you a loan or not. These criteria are: Capacity, Collateral and Character.
Capacity weighs how well your business can repay a loan. The calculation is done by banks looking at your income minus your expenditure and other obligations. You might have a great business, but the Bank needs to be sure that the income you generate will be sufficient to pay your expenditure, and still have room to repay your loan. This is why banks ask for your financial records and why it is so critical to have historical records from the start of your business.
Collateral refers to your current available assets, such as real estate, savings or other investment that you can bring to the transaction. What assets do you own and what is it worth? Banks want to be certain that if you can't repay your loan, you have enough value in your assets that they can sell to recoup the loan given.
The most important criteria for banks is Character and if they can trust you to pay back. Things like your past credit history, personal reputation, and other behavioural indicators help them estimate your reliability with financial matters. Never underestimate the power of character in transacting with a bank and that’s why building a relationship and track record before you need a loan is key.
Even if you don’t have much collateral, with character and these tactics below, banks can still see you as a potential customer for their loan:
3. Borrow money you’re sure you can pay back: After building a great relationship with your bank, loan a considerably small amount of money (relative to your capacity) and pay back before the due date. This will give you a track record of integrity and they’ll be more open to loan you a larger amount because you've paid back all you've ever borrowed from the bank. Remember it’s all about character and trust.
At the end of the day, Banks are looking to finance ‘bankable’ projects, because they make money from giving good loans. As an SME, you can be intentional about making your project one of the ‘bankable’ ones.
When you've built an excellent track record over time, banks will beg to finance your projects and loan you money!
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