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How To Prepare For An SME Loan

The Central Bank of Nigeria made changes in the regulations of the Nigerians Banks in 2019. They decided to keep the Loan to Deposit Ratio (LDR) of 60%. How does this affect you? Simple – Banks have been mandated to loan more money to businesses and individuals. Now almost every commercial bank is focusing on SME loans. 

Simply put, it is a lot easier to get a loan from a bank than in the last 10 years. Yet this seems to be not true at all. The reason for this is that you and many others are not qualified to get the loan that you want. Why? You need to have the right credit qualification to get a loan. 

Here are 5 best practices when applying for an SME loan, which can improve your chances of getting one.

1. Consolidate your banking activities

It is common for people that already have a Nigerian bank account, to have a second or third with other banks. So, they are for sure trying to maintain a balance between their resources for these two accounts. It is very understandable as we can’t depend on one account due to network issues and general security. While this a good thing for planning finances, it is not good for showing your total flow of money.

Almost every loan application is seeking only one bank statement. If you present them with multiple statements, the loan reviewer will immediately think of double transactions. So this is why it is better to prepare and prevent this from the very beginning. 

Consolidate, consolidate and consolidate your banking activities in one bank account so that they can see your full potential. 

2. Determine your credit status

Do you have some debts of any kind with a financial institution? Or do you serve as a loan guarantor (try to remember oh!) for someone? Do you have a dormant account with a negative balance? “Sharp sharp” You need to settle all outstanding issues before applying for a loan.

Issuing a loan is also a character thing. Don’t forget applying for an SME loan is connected to your business and you personally. Lenders will give you money if they see that you are always settling all payments and you don’t have debts. They are always checking the system and they can draw conclusions from there. So that is why it is important to determine your status. 

3. Strengthen your business turnover and average balance

Turnover means the total sum of money that is passing through your account. Then, average balance means a daily balance of your account divided by the number of days.

Read this interesting article about a loan rejection.

Usually, the turnover is something that is an essential check by the lender when you seek an SME loan. But, the more experienced banks are also paying attention to the average balance. With the turnover, they are seeing only your capacity. Yet, with the average balance, they are seeing the capital that is available to you. And that is why you need to build both your turnover and average balance up.

4. Keep track of your transactions

We can say that this is the most common reason loan applications are rejected. Having no transaction history on your account. Lenders think of this as fraudulent and will raise a major red flag.

It is happening a lot for owners of SMEs to use their company account like a personal account. A perfect example: ATM cash withdrawal with the company’s card – sounds familiar? One major challenge with ATM withdrawals is that no description can be added for that withdrawal or for what purpose. In such cases, the bank is unable to see more details for such transactions like if the cash was used to pay your suppliers.

So, the bank loan officers consider this management of finances inappropriate. Which can only lead to an SME loan rejection.

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5. Worthy mentions

Here are some other important tips for you:

  • It goes without saying – prepare a solid business plan that supports your existing business. How you plan to spend the money for the expansion of your business activities
  • Prepare a loan repayment plan and ensure that you are not paying all your business income to the bank as it will raise another flag on the ability to default
  • Don’t base your loan on a foreign currency-related business. If you are planning to buy and sell based on imported items, the exchange rate fluctuations can affect your ability to repay the loan. 
  • Collateral is important. Depending on the amount you are seeking, be prepared to provide collateral like land, property and other valuable assets
  • Start small! Start with taking a small amount that you can pay back without any challenges. This will build your capacity to deal with bigger loans as your business grows.

To sum things up

We hope these five tips help you in preparing better for a loan application with a financial institution. 

It is a lot easier to have your personal loan approved. They only analyze the account for that. But it usually takes a while for an SME loan. Lenders need to do checks for documentation, bookkeeping, and progress of business plans.

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