Entrepreneurs, especially small-business owners deserve all the support they can get, particularly in relatively challenging economies like Nigeria, where the risks of running a business can be as daunting as climbing Mt. Kilimanjaro in rainy season.
…paradoxically, like orphans, they are often last on the rung.
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Loans can be a great resource to leapfrog small businesses to the next stage, where it can favorably compete and meet the requirements that limit reach and sales aspiration. One common mistake small business owners make is that they neither diagnose their business at the early stage of the planning cycle nor make the loan request early enough to ensure they can find alternatives in due time. So, should you get that disappointing feedback that your loan offer was turned down, do not give up on your growth plans. All you need to check is your eligibility for a loan… the right loan from the right institution.
…but do you truly qualify for a loan, why not do a self-assessment?
You need to always self-diagnose your finance and be sure of your status, not just about your ability to take a loan but about everything around your finance. Like health issues, it is often cheaper and easier to manage a problem when it is recognized early. So, whilst noting the different peculiarities of varying small businesses, do a quick review of these seven basic requirements for a small business loan. Hopefully, it serves as a simple guide to check your status.
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- Revenue: The focus of a lender is cashflow, as it is the main source of repayment for a loan. So, if your business currently generates revenue, it is likely that a lender will grant you a loan, and the question you would need to ask yourself is how much loan you can access with your current or future cashflow. If your business does not generate revenue now, will you be able to demonstrate that it will generate revenue over the payback period of the loan, either because the use of the loan will stimulate revenue generation, or there are other reliable sources of cashflow to pay back the loan? What is important is that you must be able to convincingly show the lender how you will pay back the Whilst revenue is often used as a proxy for assessing your cashflow, it is not the only factor that determines the size of the loan you can access, especially as the lender focuses on “free” cashflow, which is simply the cash that would be available to service the loan at different times, after taking care of the critical expenses that you need to sustain the operations of the business. If the bulk of your revenue is derived from selling your products on credit, you may have to ensure that you show that you can always recover the cash from the credit sales, as lenders are more interested in the cashflow from sales and not the sales itself. Also, if you think you need more loan than the free cashflow of the business can get, you must be prepared to present other sources of cashflow which you will use to complement the cashflow from the business in meeting the loan service requirement.
- Check Credit Rating: This is about the lender’s perception of your character. Whilst there are no hard and fast rules to this fundamental requirement, a common practice (which is not necessarily right) is to think that big corporates and “renowned” individuals will less likely default on their loan obligations, thus leaving the small business owners and low/middle-income earners the last on the stage, as it is presumed that small business owners have little or no reputation to protect, hence more likely to default on the loan unlike large corporates and High net worth individuals who are expected to go the extra-mile to meet their obligations and protect their reputation. Interestingly, some empirical evidences have shown that small business owners have better character and often go the extra mile to service their loans, compared to high-net-worth individuals, who are sometimes too powerful for the lender to handle when they default on their obligations.
Beyond myriads of subjective variables used in assessing your personality/character, one of the objective measures is the credit bureau reports. Whilst Nigeria may not have a robust credit scoring system yet, the credit bureaus are not doing badly, and lenders call for your credit report from any of the three credit bureaus in assessing your loan application. If your credit record shows you have hitherto defaulted on a loan irrespective of the lender that provided the loan at the time, it simply disqualifies you for this fresh loan, no matter how long ago or the reason for the default. So, ensure you always make good on your obligations, because you are writing a history which may be important in determining your access to finance in the future!
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- Type of Loan: More often, lenders do not reject small business owners, they reject the loan application because you are applying for a loan your business does not qualify So, lay bare your need, get help, if need be, in determining the type of loan that is best suited for your business and assess your qualification for the loan. For instance, a trading business may struggle to secure a term loan, because the justification may be weak, except if such term loan is to be invested in distribution logistics that can potentially enhance sales and profit margins. Likewise, you need to understand the varying interest and appetite of different lenders, especially specialized institutions like the Bank of Industry, which does not lend working capital except as a follow-on loan to ensure effective use of its infrastructure/equipment-focused loan. It also does not lend for real estate construction and similar activities. So, seek the right type of loan from the right institution and shop around for alternatives; every offer you have helps to strengthen your bargaining power. There is little or no cost to applying for a loan before it is needed, it only helps to strengthen your bargaining power, unlike the loan application made when you are almost in a fix…you may just have to take whatever comes your way, out of fear of rejection from alternatives.
- Age of the business: Some lenders do not like to write start-up loans, no matter how good your credit seems, they just will not touch it, so do not feel bad about a rejection from lenders looking for three years operational history. Move on to the right lender and be sure you will have your loan approved; for every lender that does not do start-up, there are two that wants to explore the opportunity with you, even so the pricing may be higher, as they consider it to be a higher risk credit, so if you do not mind, start with such lender and work down the lending rate, as you show credibility and viability of your
- Collateral: Some lenders want collateral even for working capital loans. As much as it seems absurd, if it is the lender’s policy, you cannot change it, so you just must shop for lenders who are willing to grant you an unsecured loan, even so it often comes at a higher If you have collateral, it may be helpful in reducing the lending rate. For clarity, your receivables and invoices can be collaterals, if they are from credible businesses or institutions, so do not think collateral is just real estate or equipment. Indeed, you can pledge your future cashflow as collateral. If you have stable sales and cashflow pattern, you can leverage such by pledging your sales/collection account as collateral against the loan. Whilst most term loans often require collateral, you may also want to seek a guarantee as an alternative to collateral.
- Industry and value chain of your business: The sector/industry where you operate may be a showstopper for some lenders, likewise the segment of the value chain within which you operate. Some lenders do not extend credit to gaming and jewelry businesses; some do not lend to cold room/frozen food merchants and real estate developers, and the list continues. Even within a sector, some lenders are selective in the value chain they lend to. So, you need to be conscious that a lender may have rejected your application not necessarily because your business does not merit a loan but because the lender does not lend to the sector/segment of the industry you
- Your current debt profile: A major factor that would determine your eligibility for a loan is your present debt profile. If you already have a loan or two, you may consider paying off the loan or refinancing it by taking a higher amount of new loan to pay off the existing one whilst also using the remaining amount to take care of the new financing need. Most lenders would shy away from a small business that is already exposed to two or more lenders. In such situation, it may be better to seek additional loan from the lenders you are already exposed to, as they may be more willing to grant additional loan, compared to the likely negative assessment you may get from a fresh lender, whose initial disposition would be that you want to seek a new loan because you are probably messing up on the repayment of your existing facility. In truth if you already have so much loan compared to your equity, you may consider raising more equity to give you room for additional
So, appraise your business early enough and be ready for that opportunity to take on a loan to grow your business.
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