Sunday, March 15, 2020

7 Tips on How to Get Bank Loans in Nigeria Without Collateral

This post will teach you how to get bank loan without security. As a business, cash is an essential resource you need to run your business after the skilled human resources. Getting finance for a startup company is usually tricky because they have little or no collateral, or record of accomplishments to present to bankers. Nigerian banks have lost so much money due to bad credit and have tightened the lending processes. 


Banks are quick to lend to established businesses than Startups that need these loans. This article is not focusing on getting quick online loans in Nigeria through Payday or Online lenders. I will explore other ways on how to get bank loan without security. Follow the tips below to improve your chances of getting bank credit.

1. Prequalify your Business for a Loan by Building a Credit History
The first step any business should take to prove that it is prepared to run a business is to approach a bank after thorough research, to open a corporate or business bank account.

This business account is the tool you would use any time you start asking for credit from your banker. Like a student studying to pass an examination, make sure your account documentation is complete. 

Second, make sure your debit turnover is consistent. Just pay money and withdraw money from the business account regularly. Be honest when dealing with bank officials and fellow businesspeople.

Are You Credit worthy?
Build a credit history gradually, as it usually takes up to six months (not in all cases) for your banker to rate your account and see if it is worth their risk of granting you a credit. You should, in the meantime, ask your account officer what that bank requires to approve a loan applicatio

Do you have a Business proposal? Banks typically ask for a business plan thatwill include; Financial statements of accounts, government identity cards, utility bills, curriculum vitae of the management team and owners’ contributions, formal application letter showing the project you want to borrow money for, security document, and so on. 

Once the bank knows your business well from the history of your transactions, you could start by asking for small short-term overdrafts and repay on time to build a credit history.

When you do this often without defaulting, you will feel bold to ask for that massive credit. When that time comes, the bank officials know they can lend you a more substantial amount and go to bed. 

This long explanation is the foundation for these strategies on how to get a bank loan without security below. Let us start right away.

2. Salary Advance
Salary advance comes as the first choice for you to fund that startup business. Many Microfinance banks are willing to lend money to you if you work for a good organization. The limitations of this strategy include a requirement that you must work for a decent company and loan repayment term of 1 month.

Go to a Microfinance bank where you have a salary account if you are still working for a reputable company and ask for a salary advance. You may also create a direct debit transfer instruction to the microfinance bank from the bank where your salary account is domiciled if they accept it.

In most Microfinance banks, salary advance is a 30-day term, and they are usually more friendly than the traditional banks.

Though each bank has different loan and interest rate terms, most start from 6 percent interest on a reducing balance basis. You may visit Microfinance bank's websites to compare rates.
3. Invoice Discounting Invoice discounting is next on this list of how to get bank loan without security. Traditional banks like Access bank PLC is willing to lend you based on expected inflow on your invoice.

For a bank to lend you this money, you would open an account and sign a document for the domiciliation of proceeds to receive the full invoiced amount into your account in the bank.

How it works:  if you are a contractor or supplier, and you have an invoice yet to be paid by the organization you supplied products, you could get a loan of  75 percent depending on the reputation of the company owing you on that invoice. 

For example, if the amount on your invoice is N1,000,000.00, you could get a loan of N750,000.00 or 75 percent. The bank will rely on the uncollected invoice amount to grant you a credit.

If you lose the money advanced to you by the bank, by investing carelessly, the bank will recover the loan from the invoice.

4. Asset Finance
Asset Finance is a fast way to get a loan for those who run an equipment leasing company or transport business and have a good cash flow.

What will happen here is that the bank will buy the assets for you. Note that the bank knows you have a track record in this area; that is why it acquired the assets for you. You will have direct access to the asset.

In some cases, a bank could lend you more substantial amounts, for example, to build a shopping mall without any collateral. The effect of bank finance on this project is that the bank owns the assets.

Also, the bank will collect the proceeds from the business until you complete paying the loan. In this example, Asset finance removed the headache of looking for collateral for this big project.

5. Advance Payment Guarantee
Advanced payment Guarantee is another method on how to get bank loan without security. How this works is that if a company award you a large contract, it could ask for an advanced payment guarantee from you.

This advance payment guarantee is to make sure you perform or fulfill the agreement, and to protect the advance payment (10-30% mobilization fee), they will pay to you.

To get this loan, a contractor will take the Letter awarding the contract to its banker. Usually, the bank does not collect collateral for this loan.

Also, the bank will make sure it supervises the execution of the contract until it finishes.

It will ask you to sign papers and domiciliation of proceeds to make sure the company that awarded you the contract pays the full contract sum through your account in that bank.

6. Local Purchase Order 
If you are a supplier and you have a local purchase order (LPO), you can meet your banker to fund the purchase of the items. Your bank may waive the requirement for collateral depending on the value and integrity of the organization that issued you the purchase order.
The bank waives the need for collateral on the issuance of a domiciliation of full proceeds to your banker. The bank could fund this purchase order paper up to 80 percent.

The limitation of this option is that a startup company has no credit history with the bank. However, the bank can lend based on the integrity of the issuer.

7. Export Finance

Export Finance is another method on how to get bank loan without security in Nigeria. All over the world, governments encourage export.

In Nigeria, CBN offers incentives such as export stimulation funds through banks and rediscount and refinancing facilities through NEXIM. Exporters could borrow through traditional banks at low-interest rates or acquired through the National Import-Export Bank (NEXIM). 

Also, getting this kind of loan is quick. For instance, if you want to export a product to China worth $100,000 if you have a purchase order of that amount, but you have only $1,000, you can approach your bank to give you an export finance facility. Submit this purchase order and duly signed a contract to finance. But the bank will ask for security.

For the bank to waive this requirement for security, ask the importer to send you a letter of credit or a bank guarantee. Any of this document will contain a pledge to pay a certain percentage of the export proceeds to you the exporter, usually 80 percent, for the item you are exporting upon arrival in their country.

So, the purchase order plus either a letter of credit or a bank guarantee by the buyer may give the Nigerian bank confidence to grant you credit without asking for collateral.

Bonus strategy
This strategy could work for an established business. That is why it is last on our list. 

Letter of CreditIf you are an importer and the demand for your product is vast, and you and your foreign partner have long experience in the business, you can fund the purchase of goods into the country with a letter of credit.

Also, if your banker can trust your foreign partner or supplier, and if your business has good cash flow, the bank may waive the requirement that you provide cash collateral for the Letter of credit.

Note that some banks also have (a particular) import finance facility that they grant to clients who import goods into the country at different times of the year or for once or twice each year. You can explore that opportunity too.


Conclusion

In this post, I explained 7 ways on how to get bank loan without security in Nigeria. Also, getting loans for a business is hard, but getting a loan for a startup company is even harder.

For these strategies to work, you must prequalify yourself for a loan. If you use the procedures in this article, you could get a credit facility to fund the startup business and give it a chance to grow.

Begin immediately, to use these ideas, and send feedback on your experience. 


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