Entrepreneurs, especially small business owners, deserve all the support they can get, especially in relatively tough economies like Nigeria, where the risks of running a business can be as daunting as running a business. ascent of Mount Kilimanjaro during the rainy season.
… Paradoxically, like orphans, they are often the last to take the plunge.
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Loans can be a great resource for taking small businesses to the next level where they can compete favorably and meet demands that limit business reach and aspirations. A common mistake made by small business owners is not diagnosing their business early in the planning cycle or applying for a loan early enough to ensure they can find alternatives in a timely manner. So if you receive disappointing feedback that your loan offer has been turned down, don’t give up on your growth plans. All you need to check is your loan eligibility … the right loan from the right institution.
… But are you really eligible for a loan, why not do a self-assessment?
You should always self-diagnose your finances and be sure of your status, not only your ability to take out a loan, but everything related to your finances. Like health problems, it is often cheaper and easier to manage a problem when it is recognized early. So, while noting the different idiosyncrasies of different small businesses, quickly go over these seven basic requirements for a small business loan. Hope this serves as a simple guide to check your status.
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- Returned: The objective of a lender is cash, because it is the main source of repayment of a loan. So, if your business is currently generating income, chances are a lender will give you a loan, and the question you will need to ask yourself is which loan you can access with your current or future cash flow. If your business is not generating income now, will you be able to demonstrate that it will generate income over the loan repayment period, either because using the loan will boost income generation or because it are there other reliable sources of cash to pay off the loan? What is important is that you must be able to convincingly show the lender how you are going to repay. While income is often used as a proxy for estimating your cash flow, it is not the only factor that determines how much of the loan you can access, especially since the lender focuses on “free” cash, which are simply the cash that would be available to repay the loan at different times, after covering the essential expenses that you need to support the operations of the business. If the bulk of your income comes from selling your products on credit, you may need to make sure to show that you can still get the money back from credit sales as lenders are more interested in cash flow. of sales than by the sales themselves. . Also, if you think you need more loans than the business’s free cash flow can get, you should be prepared to present other sources of cash flow that you will use to supplement the cash flow. of the business in order to meet the requirements of the loan service.
- To verify Credit rating: This is the lender’s perception of you. While there are no hard and fast rules for this basic requirement, it is common practice (which is not necessarily fair) to think that large companies and “big name” people will be less likely to fail. loan obligations, thus leaving small business owners and low / middle income earners the last on the scene, as it is presumed that small business owners have little or no reputation to protect and therefore more likely to default on the loan unlike large corporations and high net worth individuals who should go the extra mile to meet their obligations and protect their reputation. Interestingly, some empirical evidence has shown that small business owners have a better character and often go the extra mile to repay their loans, compared to high net worth individuals, who are sometimes too powerful for the lender to handle when they do. fail to meet their obligations. .
Beyond the myriads of subjective variables used to assess your personality / character, one of the objective measures is credit bureau reports. Although Nigeria does not yet have a robust credit scoring system, the credit bureaus are not doing badly and lenders request your credit report from one of the three credit bureaus to assess your loan application. . If your credit report shows that you have so far defaulted on a loan regardless of which lender gave the loan at the time, that simply disqualifies you for that new loan, no matter how long or how long ago. reason for the defect. So make sure you always honor your obligations because you are writing a story that may be important in determining your access to finance in the future!
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- Type of loan: More often than not, lenders don’t reject small business owners, they reject the loan application because you are applying for a loan that your business does not qualify for. So state your need, get help, if needed, to determine the type of loan that’s best for your business, and assess your loan eligibility. For example, a business enterprise may have difficulty securing a term loan, as the rationale may be weak, unless that term loan needs to be invested in distribution logistics which can potentially improve sales and profit margins. Likewise, you need to understand the varying interest and appetite of different lenders, especially specialized institutions like Bank of Industry, which do not lend working capital except as a follow-up loan to ensure use. efficiency of its infrastructure / equipment-oriented loan. It also does not lend for real estate construction and similar activities. So, look for the right type of loan from the right institution and look for alternatives; every offer you have helps build your bargaining power. There is little to no charge for applying for a loan before it is needed, it only strengthens your bargaining power unlike applying for a loan when you are almost in trouble … you may need to just remove whatever happens to you. for fear of rejection of alternatives.
- Company age: Some lenders don’t like taking out start-up loans, no matter how good your credit is they just won’t touch it, so don’t feel bad about being rejected by lenders at the start. search for a three-year operational history. Go to the right lender and make sure your loan is approved; for every lender that does not start, there are two who want to explore the opportunity with you, although the price may be higher, as they consider it to be higher risk credit, so if you don’t mind, start with such a lender and lower the loan rate, as you show the credibility and viability of your
- Collateral: Some lenders want collateral even for working capital loans. As much as it may seem absurd, if it is the lender’s policy, you cannot change it, so you should just look for lenders who are willing to give you an unsecured loan, although it is often higher. can be useful in reducing the loan rate. For clarity, your receivables and invoices can be collateral, if they come from credible businesses or institutions, then don’t assume collateral is just real property or equipment. Indeed, you can pledge your future cash as collateral. If your sales and cash flow are stable, you can take advantage of this by pledging your sales / collection account as collateral for the loan. While most term loans often require collateral, you can also ask for collateral as an alternative to collateral.
- Industry and value chain of your business: The sector / industry in which you operate can be a barrier for some lenders, as can the segment of the value chain in which you operate. Some lenders do not extend credit to game and jewelry businesses; some don’t lend to cold / freezer dealers and real estate developers, and the list goes on. Even within an industry, some lenders are selective in the value chain to which they lend. So, you should be aware that a lender may have turned down your application not necessarily because your business is not deserving of a loan, but because the lender is not lending to the sector / industry segment that you are.
- Your current debt profile: An important factor that would determine your eligibility for a loan is your current debt profile. If you already have one or two loans, you may consider repaying the loan or refinancing it by taking a new, larger loan to pay off the existing loan while using the remaining amount to meet the new financing need. Most lenders would shy away from a small business that is already exposed to two or more lenders. In such a situation, it may be better to apply for an additional loan from lenders you are already exposed to, as they may be more willing to give an additional loan, compared to the likely negative assessment you might get from a new lender, whose initial provision would be that you want to apply for a new loan because you are probably wrong about the repayment of your existing facility. The truth is, if you already have that many loans relative to your equity, you may want to consider raising more equity to give yourself room for additional funds.
So, assess your business early enough and be ready to take this opportunity to take out a loan to grow your business.
nairaCompare.ng provides a one-stop-shop for finding and comparing loans from different lenders, planning your repayment, and checking your eligibility.