A Small Business Enterprise seeking to raise capital has two main options.
The first is Equity Financing in which the business owners give up some part of their equity holdings (shares) to an investor (moneybag) in exchange for money, technical or professional expertise. The new investor becomes part owner of the business. Thus for his or her value-added, the investor makes money when the business makes profit; and loses money when the business makes a loss.
The second option is Debt Financing or what we know as Bank Loan. This is the more prevalent option amongst Small Business owners because they would rather own the entire 100% of their dream project than share it with anyone.
To secure a Loan from any Bank, a Small Business Enterprise must fulfil some basic criteria. Making these 5-Cs positive will go a long way to guarantee the success of your loan application:
1) Character, 2) Capacity, 3) Condition, 4) Collateral, and 5) Capital
◊ Character: The bank will shine its searchlight on your credit history and business relationships. Did you ever default on a previous loan? Have you ever given a dude cheque? Do you pay your creditors timely? How is your relationship with your account officers and with the bank? We may also look into your other business relationships for credibility. All these are some of the things the bank will check as regards your character.
◊ Capacity: The bank wants to know that you have adequate expertise, competence and experience to succeed in your business. The bank also wants to know how much cash your business generates (your cash flow status). It also wants to know how much you have invested in your business. This is because a bank may not want to give you a loan that is bigger than what you yourself invested (financially) in your own project.
◊ Condition: The bank wants to know what the operating conditions and environment of your business are: Is your business regulated? Does your business comply with the provisions of Bank and Other Financial Institutions Act (BOFIA 1991) as amended? Does you business comply with the required regulations for your particular business sector? Is your business seasonal, etc?
◊ Collateral: The bank wants to know that you can provide something the bank can fall back on, just in case you default. Or is your cash flow steady and strong enough to serve as collateral?
◊ Capital: The bank wants to know that you are capable of equity contribution - say 30% or more of the loan amount you want.
These are the basic criteria for bank credit (debt financing) approval. If you don't have them all, don't worry. If you are strong in some areas, the bank can work with you to help you achieve the others. For example, if you have all the other Cs but cannot provide collateral, a bank may allow you to access the loan without collateral, given that your cash flow can repay the loan amounts as and when due.
Securing a bank loan becomes easier when you operate your account creditably; and maintain a good relationship with your bankers. To your success!
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How to Apply, Qualify and Get the Central Bank of Nigeria Small Business Loans 2020
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