So why is it so hard for businesses (small and medium-sized ones specifically) to get loans? Even though it’s long been established that debt is a very good source of financing business operations, as we stated in our SBL02 blog post.
The list below is not exhaustive, but one or more of these things may have contributed to why your loan request was declined:
1. Excessive Loan Obligations
This is also called loan stacking (that is, stacking loans on top of older loans). One of the biggest red flags for lenders is the existence of excessive loan obligations. A general rule of thumb is that loan repayments should not exceed one-third of one’s monthly income cash flow. Having existing loan obligations makes it difficult to meet this criterion.
2. Poor Documentation
This pretty much speaks for itself so no need going into too many details. The requirements for loans are usually well spelt out by lenders so not complying fully with them will not help the case of any loan applicant.
3. Inconsistent Information
In this era of the internet and availability of data, it’s quite easy to verify some of the information provided by loan applicants. Not being honest about your history does not exactly endear trust. Would you give a loan to someone you don’t trust?
4. Inadequate Cash flow
Thanks to technology and smart use of data, some level of predictability have found its way into lending decisions. Unfortunately, most lenders still use the historical cash flow in your bank statement, to determine how much you can get. For now, credit scores are still not as used in Nigeria, compared to other countries so we still rely on transactions going through bank statements for now.
5. Insufficient Collateral
Let’s face it, collateral may still be required depending on the amount you are requesting for. It’s true that companies like ours and other modern financial players have found ways to underwrite loans without a security requirement. But you just might need collateral for significant amounts. Unfortunately, many commercial banks still insist on landed property, even if there is a law that permits the usage of movable assets.
That’s it on this edition of SBL. Do let us know what you think in the comments and remember to share with your friends. Next week, we will look at tips to improve your chances of getting a loan as a business.