How to Get Bank Loans in Nigeria With and Without Collateral

Running a business is hard. But what’s even a lot harder is getting a bank or financial institution to provide you the required funds needed to grow your business. In Nigeria, securing a loan or credit facility is a lot more difficult than many other places around the world, because financial institutions don’t trust small businesses. The risk ratio of lending money to a small business is very high, and most often than not, the money is usually lost.

This unfortunate series of failed businesses build up terrible losses for the banks, who in turn go on to deny credit facilities to start-ups who need them, but rather, focus on funding large companies that have a steady cash flow, track record, and a far higher chance of repaying their debts.

If you’re a small business and are thinking of how to get a credit facility from a financial institution, here are 8 effective ways to get bank loans in Nigeria:

1. Salary Advance:

Many microfinance banks give loans to individuals against the value of their salaries. If you run a small side business but still work for an organization, you could approach micro finance banks like RenMoney and co. to get a loan, which you could then use to finance your short-term operations, pending when you repay it at the end of the month. Every micro finance bank has their own terms. Visiting each to understand what they will or will not allow will determine whether you get the loan or not.

2. Invoice Discounting:

If you’re a contractor, this is a great bet for you. Several banks like Access Bank issue loans to businesses who have outstanding invoices for payments owed. For instance, if you run a supply chain business and are expecting an outstanding payment of 1 million Naira from an organization, you could borrow up to 75% of the value of the invoice from a bank to finance your next supply, pending when the debtor pays up. This way, if you lose the amount borrowed, the bank is still sure of recouping their money from the outstanding invoice you’ve lodged with them.

3. Collateral:

This is the most common way of getting bank loans in Nigeria. If you want to get money for most business activities, you’re usually required to have collateral that is about 50% more valuable than the loan you want to get. The collateral could be a house or any other valuable asset the bank is confident they’d be able to monetize in the event that you do not pay up.

4. Asset Finance:

If you run a business like a transport company, equipment leasing company, or the likes, and have a good cash flow, you could approach your bank for asset finance. In this instance, the bank would finance the acquisition of the assets because they’re certain you already use these types of assets to run your business. In some other cases, a bank may finance the building of an even larger project like a shopping mall as part of their asset finance scheme, without collecting collateral from you. Whenever banks finance the acquisition of assets, they’ll literally own the asset and its revenues till it is fully paid for. This saves you the trouble of having to put up collateral before you can fund some of your projects.

5. Advanced Payment Guarantee:

Advanced Payment Guarantees are usually sought when a company demands that a contractor they just awarded a contract provides them a form of Bank Buarantee (BG), before they can disburse the first batch of payments to them. Companies demand a BG to ensure they can still recoup their losses in the event that the contractor disappoints.

When contractors find themselves in a position where an organization is demanding a guarantee from their banks, they take a copy of their award letter and important information about the client to seek an advanced payment guarantee from the bank. This guarantee could usually be issued without collateral required, depending on who the client is.

6. Purchase Order:

When you have a Purchase Order (PO) from an organization, you could visit your bank to seek funding to carry out the supply. Most banks would usually require you present collateral before they can fund the supply. But on special cases, and depending on the company size of your client, the bank may fund the Purchase Order (PO) without requiring collateral.

7. Letter Of Credit:

These are usually given to importers. When an organization or individual has a built a steady supply link with an international organization to import goods into the country, the purchase could usually be funded by a Letter of Credit. Depending on your locally available market, the reliability, age and reputation of your foreign partner company, and the cash flow of your business, the bank may or may not require collateral from you.

Asides just a letter of credit, some banks has a special import finance package for businesses that do one-time imports at varying periods. This could be once or twice a year, and not necessarily a steady import contract with a supplier. Important finance options should be carefully considered for your business.

8. Export Finance:

Governments around the world love to finance exports, and the Nigerian government is not left out. With a major emphasis being placed on exportation in the country, securing an export finance loan from banks is a whole lot easier than securing a loan to start a business in the country.

To make securing the loan easier, if you can get the importing organization to place a financial instrument like a Letter Credit or Bank Guarantee for the payment of goods upon arrival in their country, the local bank here in Nigeria would be more than happy to fund the export.

Depending on what you’re trying to export, a Purchase Order in hand and/or a financial instrument in place by the foreign client will build the trust of almost any bank in Nigeria in your business, enough to fund the supply of the product and also to post a performance bond on your behalf, if need be.

To Sum It Up

Getting a bank loan or finance in Nigeria is never an easy task. But having the right information and getting your organization prepared is the easiest way to guarantee you’ll someday be qualified to get the finance your business deserves. Information is useless unless you put it to good use. Applying what you learn in this article to your fund raising tactics with banks will determine how much faster your business can grow with respect to the finance it would be able to raise.