March 16, 2017

Your business and your bank: Security/Collateral

By Emeka Anaeto

We began discussions on bank loans for your business about a month ago traversing basic considerations for a successful loan application. Last week we ended with TERM or TENOR of the loan.

Ordinarily this week’s focus on SECURITY or what is popularly (though wrongly) referred to as COLLATERAL, should be first in the list of considerations for a successful business loan application. This is because for any bank, the security of the loan is the most single important factor in the list. It is even bound in the relevant regulatory prudential guidelines from Central Bank of Nigeria, for banks in Nigeria not to do what is called unsecured lending.

However, for technical reasons I placed Security after the other three considerations because you should have gone pass the first three before your loan request could begin to be assessed. It is at assessment stage that the issue of security comes up.

For a layman, security, as the name implies, refers to a protection against default in loan repayment. So the borrower provides the security, the lender takes hold of the security before granting the loan.

For any loan application to be successful, the borrower must provide security considered and accepted as adequate to the lender.

Let me also state here that packaging attractive security for bank loan is particularly important not just because of scaling through the huddles but because it would boost the borrowers bargaining power on terms of the loan, specifically cost of the loan, generally captured as interest rate. The more attractive the security is the better the terms are for the borrower. It also makes the approval process faster.

Following our previous editions covering loan amount and tenor, the discussions on Security would be based on both, that is to say that the security would be determined by the amount of loan and the duration.

For instance, a loan of N10 million should naturally require higher security than that of N8 million. Not only this, the lender would ask for security which value higher than the loan amount by certain percentage. Similarly, the security should be active not just within the duration but substantially beyond the life span or tenor of the loan also by certain lead time. Next week we give details of how to package such security.