Getting a business loan in Nigeria may seem easy, but there are facts to note. There are several options available to you if your business requires some funding. Finding an investor or someone to partner and share risk with in your business in Nigeria is no easy task. Sourcing for loans is a normal activity for business ventures, both large and small.
Many businesses need capital or funds to expand, so opting for a loan is almost always a frequent course of action. Loans are a popular forms of financing a business venture but before one considers taking a loan, there are things to consider. It is important to know the pros and cons of getting a business loan in Nigeria.
Among viable loan sources, commercial banks are the biggest lending sources for businesses. They are most likely the first option to cross your mind when you need to get a loan. Loans sourced from banks have the lowest cost, but that is no walk in the park to be eligible for it.
Many banks require a high level of creditworthiness before they dish out loans. They also take a longer period to process and analyse your loan applications. However, qualifying for a conventional bank loan can be a cost-effective way to sustain the flow of funds or obtain funds to expand your business. This article aims to discuss the pros and cons of obtaining a business loan in Nigeria.
Banks don’t try to influence how the money is spent
One wonderful advantage financing from loans has over financing from investors, is that the loan source never attempts to determine the expenditure of the money. Banks and other sources of loan do not dictate to you how you should run your business.
As far as they are concerned, putting that loan in your hands is their own business, not how the loan is spent. Also, unlike financing from an investor, the loan source just provides the option of funding the business. A good number of investors will become business partners once they put their money in your hands. This might be an inconveniencing if you want to run the business alone.
It is mostly investors who are silent partners that do not involve themselves in how the business is run, and they are the minority. For banks, they are indifferent to the way you handle the money. All that matters to them is getting it back with a certain interest rate.
The time window between when you get the loan and when it’s due for payback is entirely your show. So if you are the type that desires full powers over your business venture, it’s overseeing, operations and expansion, a business loan is a recommended option.
They’re convenient and accessible
Reaching out to your bank and other loan sources to discuss the possibility of obtaining a loan for your business is not a difficult task. It is a very convenient option and something that should be readily obtainable if you meet certain criteria.
Meeting that criteria means you will get that loan you seek within a short while, and timing is crucial when getting a business loan. This timing is essential, especially when the business is an opportunity that’s time-conscious. Also, suppose the loan is for expansion, most businessmen cannot afford the luxury of waiting until their profits are big enough to plough them back into the business.
Going for financing from investors is also not as quick as you think. First of all, you have to persuade them that their money would be put to good use and make them more money. Still, there are no guarantees that they will invest even if they are persuaded.
An investor might decide to back out at the last minute. Although applying for a loan at the bank or other viable loan source isn’t as quick as it takes time to process or analyse the application. However, the upside to it is that provided you meet the criteria they want; it will be much easier dealing with them than most of the alternative loan options.
Healthy interest rates
The interest rate that comes with most business loans is, in fact, healthy for the person applying for the loan. Due to the fact that banks are in competition for customers, they will be committed to give a loan condition that is not far-fetched from what their rivals are giving.
Not only is the interest rate healthy to the business owner seeking the loan, but it is also healthy for the bank as it also makes them a sizeable return on their loan. The interest rate that comes with business loans from banks is better than those that come with personal loans.
The icing on the cake is that the interest to be paid is most times eligible for deduction from tax. However, this depends on the nature of your business. To find out, you can reach out to your local authority to enquire whether that is the case or not for the business you operate.
Profits made from loans solely belongs to you
A majority of businessmen opt for a business loan for expansion and tap into a new business opportunity. Doing this makes the business prone to more profits. Opting for funds from an investor will ensure that you do not get to keep all this profit to yourself, as the investors will have their share.
Most times, their share is very sizeable. The business will be assessed on how much profit they make from it. When it comes to a business loan, the scenario is different. For loans, the interest rate is fixed and not flexible. This means that it doesn’t matter how much you realise from that loan. It is the agreed interest rate that you are paying to the bank.
Suppose a N500,000 loan makes you a N1,000,000 and the agreed interest rate was 10%. In that case, you will be paying the bank a total sum of 550,000 across the duration of the repayment period. If that same N500,000 loan makes you N3,000,000, it is still N550,000 you will be paying to the bank.
Enables you to build creditworthiness
If you are a first-timer, this could be a great opportunity to create a high credit score that could benefit you immensely in the future. Having a good credit score could get you bigger loans.
If you apply for a loan of N200,000 and you can pay back before or as at when due, there is a very high chance the bank won’t hesitate to give you a bigger loan in the future. It takes a series of loans to build creditworthiness, and your loan and transaction history is key to determining this.
Feasible repayment plan or duration
Depending on how much loan you obtained or are applying for, the banks give you a time window favourable to you in terms of paying it back. Huge loans have repayment plans extending to several years.
Medium-sized loans might cover a couple of years, while small loans take some months. This gives the business owner ample time to invest this loan, profit from it, and pay the bank what it owes.
Not all businesses are eligible for loans
There are several rules and conditions that banks and other loan sources establish for the approval or rejection of business loan applications. Most definitely, not all businesses will meet up to the criteria laid down by the bank to be eligible for business loans.
It is imperative to know the ways bank proceed with an analysis of loan applications before you go forge ahead with applying for one. It can be annoying to invest your time drafting an application for a business loan only to be rejected by a certain bank.
Handling this rejection might not be easy, and you might be discouraged from making further attempts to secure the loan from other banks. It can keep you at crossroads as you might consider your next course of action.
Your assets are often used as collateral security for these loans
A lot of bank loans use the business assets applying for such loans, as their collateral security. This is a disadvantage to the business owner because it reserves the legal right to confiscate the asset if you don’t meet up on repayment for the loan you took.
Usually, the business owner is aware of this risk, but they are usually confident that they will repay the loan, and it won’t come to that. It is a normal way to feel during the initial stages of opting for a loan insured against your assets.
The moment the loan doesn’t make you as much as you hoped to enable you to repay the loan with the required interest rate, then that security against your loan becomes a problem for you. You need to consider this risk very critically before you opt for a business loan.
There is a tendency that you won’t get the total amount applied for
Certain banks might review the loan for business application by certain business owners and only give them a part of the total money applied for. This could be because they are not convinced that your business doesn’t require all the applied money. This mostly applies to small businesses.
They tend to give between a range of 65%-75% of the total sum requested for. This can be very frustrating for businessmen who have already built a business plan based on the full loan amount.
Such a setback brings them back to their business plan, and they have to find a way to lower costs and opt for more cost-effective options in their plans. It is an occurence many business owners pray to experience in Nigeria.
You need a strong credit score
To have a high chance of your loan application being accepted, you need to have a strong credit score. This can be a daunting challenge for first-time loan seekers and haven’t had the history or opportunity to attain a good credit score.
Most first-time loan seekers get their loan application rejected, which can be very annoying for such individuals. It makes one wonder how they will build a good credit score when he hasn’t been allowed to do so.
Most business loans are secured against specific collateral
A good number of loans are secured against certain assets. The most common ones are assets of high value such as buildings, lands, other fixed assets, cars and business assets.
If you are a loan-seeker and you want to apply for a business loan in Nigeria, you must have collateral security for that loan. Banks aren’t interested in taking unnecessary risks, and they certainly don’t give out loans in blind faith.
You need to ensure that your business venture is always cautious when it comes to getting business loans. Loans can be wonderful options for businesses that don’t want the inconveniences that often comes with getting an investor or a partner.
However, making sure that you will be able to repay the money that you applied for is imperative, because your assets could be seized as collateral if you fail to meet up with the repayments.
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