Do you intend applying for a bank loan? If yes is your answer, continue reading.
The last thing that should happen is entering a bank for a loan and getting a rejection notice. The same is true if you are planning to expand your existing business.
Presenting a good feasibility report to your banker will make a good impression and can facilitate your getting a bank loan faster.
General requirement for a bank loan:
Generally, if you need a bank loan from your bank to help finance an existing or new business, it is most likely your bank will require the following information:
- A clear statement of the amount of the loan required
- A clear statement of the purpose of the loan
- The period or term of the loan
- Your feasibility report (if is a new enterprise or expansion of an existing one), plus an authentic financial report of the performance of your business, if is an already existing one.
- Your management background and competence. The bank is very much interested in learning about your management background, because without competent management background the business will run into trouble and the repayment of the loan becomes difficult.
- Your repayment arrangement. The bank will be keenly interested in knowing how you plan to repay trhe loan. Hence, they will to evaluate your cash flow forecast. Remember the cash flow forecast or cash budget that we talked about in the previous chapter.
- Any security you can pledge. Banks in general, and in Nigeria in particular, want all sorts of security. You are advised to find out from your account officer what kind of security will be required before filing your proposal.
Banks generally prefer a security that can be quickly turned into cash. Examples of such securities are Government Bonds, share certificate and insurance policies. Other kinds of securities that can be pledged to a bank are equipment, real estate like building, and your other property of value.
The examples given above do not exhaust the list of securities that can be offered to your bank to enable you obtain a loan for business. Likewise, the list does not exhaust all options open to a borrower in obtaining a loan. You may still be able to obtain a loan even without security, if you can get a guarantor acceptable to the bank.
Members of your family, friends and relations can also be of assistance in raising loans for you. You can also raise finance through the popular esusu or through thrift and co-operative societies.
It is not likely, however, that any financial institution will be willing to provide more than two-thirds to the cost of your proposed project. In other words, banks and other financiers watch the debt-equity ratio in appropriate cases in deciding whether to approve a loan or deny it.
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Why banks insist on high credit standards:
Banks usually require high credit standards in order to be able to get back their money. They do not actually own the monies they lend to borrowers. They give from the monies deposited with them by other customers, meaning that they are entrusted with public money. A bank or any other financial institution acting in this capacity of trust must, therefore, jealousy guard the money so entrusted do it, if it must maintain its reputation.
Banks in Nigeria are under the supervision of the central bank of Nigeria. (CBN). Thus, a banker’s decision on a loan application will be influenced by the following factors:
- Government policy
- Bank policy
- Customer’s interest
The government regulates the activities of banks in this country through the Banking Act of 1969 and the Banks and other financial institutions Decree of 1991. Apart from regulating, the Government implements the economic and industrial policies of the country. Besides, banks in Nigeria must comply with the relevant provisions of the companies & Allied Matters Decree, 1990 and operate within its framework. In the final analysis, Government is the regulator of the economic and financial system of the country.
Agriculture receives the highest priority, followed by the manufacturing and construction industries. In giving loans, therefore, banks have to reflect Government policy as contained in the Central Bank guidelines. This is so because the CBN acts as Government agent in the implementation of Government directives and regulation of the banks.
Each bank has its guidelines on lending by which it guides its lending department. Such guidelines must, of course, be consistent with the central bank guidelines. Each bank evaluates the loan application, taking into consideration the standing of the customer and his past performance, the purpose and amount of the loan, the period and the source of repayment.
The purpose of the loan must be acceptable and the amount sought must be reasonable. No bank will be willing to finance the whole cost of a project. The borrower must have a stake in the business by also risking his own money in the project. The period by which the money will be repaid must be quite reasonable and the source of repayment must be certain. This is where your feasibility report and the past financial performance of your business become particularly useful. A business should repay its debts out of it profits.
Sometimes a customer may be denied a loan or an advance in his own interest. It is common for a customer to be overly optimistic about the profitability of his project by under-estimating the possible difficulties he might encounter. As a result of these considerations, the banker tries to make sure the loan request is viable and not one that will land the customer in disaster and make repayment difficult or impossible.
Bearing all the preceding considerations in mind the bank subjects your feasibility report to the following appraisals:
- Market Analysis or Appraisal
Here he wants to make sure that proper market research was done and that there is a market for your product or service.
- Technical Appraisal
Here the banker wants to be sure that the production technology or process is feasible and that adequate technical arrangements have been made to ensure a successful implementation of the project.
- Managerial Appraisal
Here the bank tries to satisfy himself that the management team is competent.
- Commercial Appraisal
In evaluating the commercial arrangement in your proposal, the bank evaluates your marketing plan to be sure that you have made proper arrangement for the marketing of the product or service, and that adequate arrangement has been made for a steady supply of raw materials relevant.
- Financial Appraisal
Under this heading the bank evaluates your financial projections or forecasts, not only to ascertain their accuracy but also to determine the profitability of the project. He also wants to determine whether adequate arrangements have been made for financial the project and that there is a proper balance between debt (borrowed capital ) and equity (owner’s capital).
- Economic Appraisal
The bank would also like to determine what contribution your project will be making to the economy in terms of saving foreign exchange and employment generation.
- Legal Appraisal
The legal department of the bank would like to make sure that your business is in accordance with the Nigerian law, particularly if it is a joint venture.
You can see from the above the importance of your doing a good feasibility study before submitting your loan application to your banker.
With a good feasibility report, your chances of getting a loan are high if your project is feasible.