Collateral – a major hurdle denying SMEs’ access to loans

• In a country of over two hundred million people, with relatively low standards of living, there is a lot of opportunities to explore. Interestingly, many Nigerians have the passion and creativity to fill the vacuum, with great business ideas that would not only earn them great profits but also improve the wellbeing of fellow Nigerians by meeting their needs and creating jobs for the youths. However, one major hurdle that continues to kill the passion or business idea is capital! At best, many small business owners rely on their savings, support from family and loan from friends to raise capital for their business. Unfortunately, these sources of capital are never enough to start or grow a business. Every business needs better access to capital, especially loan. Of course, many business owners want loan to either start or grow their businesses, but they just can’t meet the terms and conditions. One of such difficult conditions to meet is Collateral!

Collateral is an asset of the borrower that is pledged to the lender through the tenor of the loan, with the agreement that the lender can take over the asset if the borrower defaults on repayment of the loan, as well as interest. Lenders want collaterals from borrowers for two main reasons. First, as an assurance that the borrower would pay back the loan since it is expected that the borrower would want to recover the collateral because the value of the collateral required is often more than the amount of the loan. Second, lenders can sell the collateral to recover their money if the borrower’s default on the loan. As logical and fair as it may be, the request for collateral is a major challenge for many startup businesses in accessing loans.

The jinx has since been broken, you can get loans without collateral

• Whilst some lenders, especially traditional banks still require collaterals as a major condition to access loans, especially for SMEs and start-ups, many lenders have loan products that break this jinx. Such loan products, often called unsecured loans, do not require any collateral. So, you do not necessarily need a collateral to finance your business growth or that start-up. Yes, you can get a loan without collateral, it’s real and that is the power of information. Whilst you are depressed because you cannot finance your business, and you are wailing over your inability to provide collateral to your lender, other business owners are not only accessing loans without collaterals, but they are also choosing amongst options to be sure they are accessing the right loan at the best terms possible. This is the power of nairaCompare.ng, curating information of different loan options for you and bringing together everything you need to know about loan options on one simple platform.

To compare business loans of up to N2,000,000 in Nigeria, click here

• It is important to note that loans without collaterals may attract slightly higher lending rate and fees, but it may help to meet your need. So, to the extent that the expected profitability of the business can accommodate the cost of the loan, it may be worthwhile to consider it in starting or growing your business. Of course, searching for the unsecured loan with the least cost on nairaCompare.ng is very important and in fact the cost may sometimes be the same with those lenders insisting on collaterals. It is also good to know that there are ways to also walk around the challenge even for lenders that still insist on collaterals. A good approach which many do not know is to get a guarantor and I hope you know that a guarantor does not have to be an individual, it may be an organisation. For instance, Impact Credit Guarantee Company, a company owned by Development Bank of Nigeria, does not give loan, but provides guarantee to start ups and small businesses to access loan, as the guarantee provided by ICGC serves as a collateral for you. A number of other organisations may serve the same purpose for you, including even some lenders and insurance companies, who may not be able to lend you money but may provide guarantee to the lender, on your behalf, in lieu of collateral. Similarly, as the owner of the business, you may give your personal guarantee to the lender, as a way of serving as guarantor to your business, even so some lenders who want collateral may not accept this as a sufficient provision.

…but you need to present at least two things in lieu of collateral

• Since lenders ask for collaterals as an assurance that the borrower would pay back the loan, with interest, it is often important that borrowers provide some other types of comfort to the lender, in lieu of collateral. Interestingly, the basics of collateral requirement come from what lenders refer to as the “3Cs of Credit”; Character, Cashflow and Collateral. Most lenders who are willing to grant unsecured loan want to be sure that you have the right character and cashflow, even if you do not have collateral. So, when you are applying for an unsecured loan, ensure that you are able to convince the lender with these two things. One way to convince the lender of your character is to ensure that you have a good credit score.Do not mess up your credit history because that may become a dent on your character and may deny you and your business that opportunity of getting a loan without collateral. Whenever you take a loan, ensure you pay it back because the records are with the credit bureaus. On cashflow, you need to convince the lender in clear terms that the business would be able to generate enough cashflow to meet the obligations of the loan: payment of interest and repayment of principal. This is one of the reasons why you should ensure that you carefully search for the right type of loan for your business. For instance, do not take an overdraft or 3 month loan, if you know the business would only generate enough cash to repay the loan after six month or one year. Don’t be under pressure to accept any loan offer that comes your way because you do not have collateral, search for the right way: there is always the right loan for your business, you just need to search for it on nairaCompare.ng.