Funding has always been a topic of discussion when it comes to growing businesses in Nigeria with many small businesses and start-ups raising the needed funds from savings or family and friends. The general opinion is that banks are always unwilling to lend to small businesses but would rather focus on the big players.
While this may be partly true, it is not always the case as banks also have to ensure that the assets they are creating through the lending would not just be profitable for them but also ensure that depositors’ funds are not blown away.
Funding new businesses is very risky for banks. So understandably, they are nervous about start-up loans. Hence, those loan applications rejected by banks are not always based on the applicants’ circumstances. Some banks and financial institutions are finding ways around these ‘anxieties’ and offering collateral-free loans to new businesses in the Small and Medium Enterprise (SME) business sector.
Before giving you a loan, banks need to ascertain that you are creditworthy whether you are a new or existing business. Banks look at your credit score and report because it gives them insight into how you manage borrowed money.
A poor credit history indicates an increased risk of default. This scares off many lenders because there’s a chance, they may not get back what they lent you. There are several credit bureaus in the county that can provide credit scores.
Credit bureaus are there to aid financial institutions to assess and better manage risks associated with lending. To equip financial institutions with the required infrastructure and tools for processing and managing loans to MSMEs and individuals.
In applying for a loan from a bank, ensure that your venture or the purpose for which you are seeking funding aligns with the goals and interest of the financial institution you want to apply to. While some banks have a preference for agric, some others are geared towards value chain or export promotion.
Do your research and find the bank that aligns with your business as this increases your chances of getting the loan. Speak with your banking officer or relationship manager on how you can key into the goals of your bank.
Also, there are several intervention funds by the CBN, BoI and the federal government as well as international development finance institutions focused on different sectors. You can seek out these intervention funds and apply for them.
In most cases, the intervention funds have a lower interest rate with the majority having single digit rates and an easier repayment plan. However, you must know which one is most suited for your business financing needs.
Before also approaching the bank, review your plan for the loan, consider all the pros and cons, chew on the idea for some time, review the list of your prospects, pitfalls and most importantly the figures, this is where many entrepreneurs hit the first ‘high jump’!
Having made your projections on how much would be needed to start things off and down the line (in a few years), how much profit should be rolling in. But before profit, there must be capital. For this, you clean out your savings, borrow from family and friends but you still find yourself short off the mark. You can then consider getting a loan.
For a new business, you should have a business plan that outlines in detail your business objectives and how to go about achieving its goals. A business plan lays out a written roadmap for the firm from marketing, financial, and operational standpoints.
Get your business registered and open a corporate bank account. These will ensure the venture is recognised as an entity. Even if the new business started as a side hustle or hobby, for it to grow, it should be registered by a recognized body (e.g Corporate Affairs Commission) and show its financial savviness by having a bank account.
For existing businesses, banks will require your financials to ensure that you have the capacity to repay the loans in terms of funds management as well as inflow. Your financial history will reveal the level of your receivables, your debt-to-income status, cash flow, obligations and other parameters that would assist in determining that you have the capacity to manage the funds properly and repay as at when due.
This is where the essence of bookkeeping comes in for small businesses. Even for a micro business, it is essential to have a record of sales, have a separate account for the company rather than use a personal account where personal spending is mixed up with that of the business.
Be open to assistance and recommendations, either from mentors, bank staff or advisory services. Yes, it’s your business idea but you need people to make it come alive. Be clear on what loan you want, how you want it and for how long you want it. If you are clear on what your business idea requires to start off, you are likely not to derail as time goes by and this will increase your eligibility for funding.