During the 2023 Christmas holidays, I had the rare, yet delightful, opportunity to take a needed break from work to have drinks with friends and industry colleagues, most of whom are banking sector practitioners.
As you might imagine, our ‘gist’ veered into the realm of business and the challenges we each faced in our spheres of work.
I, being a budding ‘corporate finance’ broker, shared my challenges with helping clients, particularly start–ups and small businesses, raise funding for their corporate endeavours, particularly when my clients are sometimes insistent on starting with raising ‘debt’, over equity, since equity, good as it is and might seem, does have its drawbacks, particularly for early stage entrepreneurs who would like to control as large a chunk of their business as they can until they feel ready for equity investments and the challenges that come with managing investors.
Of course, one of the easiest channels to debt financing is a commercial bank loan as these are more readily ladened with cash to lend.
Even with the many policies passed by both Nigeria’s government and the Central Bank of Nigeria to ensure small businesses get the needed financing for their endeavours through loans, a lot of banks, quoting the exact words of a colleague at the gathering, “still turn down more than half of small business loan requests, sadly, for a myriad of reasons”.
- “Of course, you must understand, there are quite a few cogent reasons for this”, one senior industry colleague stated.
- “And in truth, a lot falls back on the small business(es) and their owners who usually either do not understand the process, but still just waltz into the bank expecting either to be pitied and offered the loan, or that their request(s) will be approved overnight, without proper in–house procedural checks, which, in many cases”, he added, “could take weeks because of the stopgaps involved”.
He went on to say
- “And let’s be honest bro, this is not our money. We are offering other people’s monies to high-risk businesses to engage in the enterprise(s) that even we, as bankers, may sometimes struggle to understand or see its immediate benefit to either the bank or the economy, not to talk of being distressed with one wave of a Nigerian government, or CBN policy wand”, he concluded.
“It’s tough bro!” one corporate banking friend exclaimed. “Not just for the small businesses, but even us bankers, and trust me when I say we do not enjoy turning down these businesses, it’s just, in many situations, and following the rule book issued us, we oft have little choice than to offer more loans to bigger, more established companies whose business model(s) we understand and who understand the processes of requesting loans that get quick approvals”, he said.
“So, any suggestions for the budding start–up or small business owner then?” I asked the gathering. “But you, of all people should know these rules even better than most of us!” One of my former colleagues said in laughter.
“Perhaps, and I think I still do” I replied with a smile of my own. “But, for the sake of clarity, maybe even for a little re-education that I could also share with my clients and readers, we should go through them again?” I pleaded.
Quite a few reasons were subsequently mentioned, but I have disaggregated them into two articles, and hopefully, we shall discuss the rest later.
- Poor Credit History: In more developed climes, banks require a credit score as an indicator of how risky it is to issue you a loan. In Nigeria however, with the credit score scheme still in its infancy, not having a prior relationship, more commonly known as a banking history, with a bank for at least 6 months is typically a turnoff for many banks.
Advice: When starting a business, seek to ‘befriend’ an officer within the establishment linked to loan considerations. These should be able to vouch for you come the loan request time, and should be able to even put you through the types of loans you can access, their regulatory requirements, and how best to apply.
- Insufficient Collateral: These refer to ‘legally owned and ‘unencumbered’’ property or functional equipment (particularly heavy equipment) that the bank can hold on to should you fail to repay your loan obligation. Lack of sufficient collateral makes lenders feel less secure and more likely to deny your loan applications.
“Nobody likes to seize anybody’s property bro”, my corporate banking friend began. “We understand the importance of such assets to its owners. However, everybody sleeps better knowing there is something to hold onto should the worst ever happen. Another reason we are typically particular about collateral is that it reminds the loanee to not relent in keeping to their obligation(s), as the recovery of failed loans can be a painful and exhausting exercise that does no one any good”, he lamented
Advice: Finding suitable collateral to back your intended loan obligation can sometimes be such a prickly challenge to surmount, that most small businesses would rather seek other means of raising capital.
In cases where you neither have nor have neither owned property nor heavy machinery to offer, certain businesses do specialize in offering such backings, at a fee of course.
Depending on your negotiation skills, present and future business cash flow, the strength and your belief in your vision for your business, and the size of the loan you wish to take, this is a viable avenue to consider.
Or, you can simply start with a small loan request you are sure to cover and grow it gradually as your business progresses.
Following the words of Bob Hope, a famous American producer and entertainer, “A bank will only gladly lend you money, when you can prove that you do not need it…”
To be continued…
Brain Essien is a financial analyst and business process consultant, with expertise in investment banking, business plan formulation and pitch deck design, crowd/private equity and seed fund brokerage. [email protected].
