Every business at some point in its
operating cycle will require some form of finance to pay its short-term
indebtedness, fund new projects, or to acquire operating assets.
Individuals at some point in their lives
may also need bank loans to help fund the purchase of a car, mortgage
for a house or buy house hold appliances. But to get a loan there are
important information you must be aware of. Here are some of them;
1. You need to formally apply to a bank
for a loan – When most people decide to approach a bank for a loan, they
typically believe a business plan is all they need.
However, not all businesses require a
business plan but all loans must require that you apply to the bank
formally. As such you must properly articulate your needs in your
application letter.
Continue reading after the cut...
2. Banks charge interest on a per annum
basis and they are not fixed – banks do not charge interest rates per
month but per annum and on the outstanding balances.
For example, when you apply for a loan
of N1m for a three-month tenor at an interest rate of 20 per cent, your
interest will be N50,000, which is 20 per cent of N1m apportioned for
just three months out of the 12.
The interest rates offered to you are also not static and can increase or decrease depending on market conditions.
3. Different banks offer different
interest rates and terms and conditions – Just the way the price of
goods and services differ in the market so does the interest rates and
terms and condition banks offer.
Whilst some might favour you in terms of
lower interest rates, others might include shorter repayment period.
This takes me to the next point;
4. Never ignore the terms and conditions
– Bank Offer Letters always include a set of “Other Terms and
Conditions” or “OTC” which complement well known conditions such as
interest rate, tenor.
Most fail to read these additional
conditions and usually results in the bank having enormous powers over
your business and determining what it can do in times of dispute.
5. Banks always ask for a collateral or
some form of security – Banks, no matter the type of loan you ask for,
will demand some form of collateral, especially if yours is a small
business. It could be a landed property, asset or even your personal
guarantee.
6. Defaulting in repaying your bank loan
when it’s due doesn’t mean the bank will take over your business – Yes,
banks like to avoid the disputes as much as you do and, quite frankly,
want you to succeed because your success and theirs are directly
proportional.
Even if you are short on payment when
due, you must make effort to service the loans as much as you can. This
is useful and shows good faith, especially when you are seeking a
restructuring or refinancing of the loan.
7. You can always attempt to refinance
or restructure your loan – Following from above, you can always approach
your bank to restructure your loans if you think the current terms are
not favourable to you.
And it is not also when your loan is bad
that you can approach a bank. You can also approach them when your
business is doing well and service your loans promptly.
Refinancing your loan involves approaching another bank to take over your existing loan as a new lender.
8. You can ask your bank for a
moratorium – A moratorium is simply a bank permission to a borrower to
suspend repayment of principal for a period of time. Because some
businesses require time to start making money.
Banks recognise that and will often
allow borrowers a period of grace (one month, three months, one year
etc.) where they only pay interest and resume paying interest and
principal at the end of the moratorium. That way the business can use
the extra cash to invest in the business.
9. The biggest threat to defaulting is
not your interest rate but your Debt Service Coverage Ratio – Your DSCR
is simply about cash flow compatibility.
The cash you generate must be able to
cover the repayment of your loans and interest after you deduct your
operating cost. If this ratio is less than one, then you are more likely
to default and face the wrath of the bank.
10. Banks have hidden charges – Apart
from the interest rate banks charge, they also charge you fees and
C.O.T. But, off course, we are familiar with these.
However, banks also have other cost
which they mostly do not tell you when you apply for a loan. You should
have your accountant frequently scrutinise and analyse your bank
statements for any sign of charges other than those agreed with the
bank.
These tips are not exhaustive and must
be paired alongside the unique peculiarities of banks. For example, some
banks are good with SME financing and others with trade financing. Make
sure you identify the right bank that understands your business and
your goals.
- Ugodre Obi-Chukwuu (ugodre@googlemail.com )
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