Getting a loan to start up, fund or expand a business is always a challenge for most entrepreneurs, especially in Nigeria where loan facilities are a handful to acquire. A loan is a debt provided by an entity (organization or individual) to another entity at an interest rate, and needs a promissory note which bears the principal amount of money borrowed, the interest rate and date of repayment as evidenced of commitment.
The whole process of loaning requires a lot of trust, and if you have not built that over time, it might be very difficult securing a loan, from both an individual or a company. As a borrower, when you receive an amount of money, called the principal, from the lender, you are obligated to pay back an equal amount of money to the lender at an agreed time. Anything beyond that time runs down your credibility, and that’s the problem most people have – paying back a loan at the set time.
Your attitude towards money management will effect your eligibility to get a loan as well as your ability to pay back. Nobody wants to have his money tied down by a debtor, so how do you build a good standing and ensure that you’re never denied from taking out loan to buy a car, property of even establish a business?
1. Check Your Credit Score Often
A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of the person. Lenders usually use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. So if you’re planning a large purchase that will depend on your ability to receive a loan, you should keep up-to-date with your credit score on a monthly basis.
Note every single dime that comes in through your hand/account in a document (most preferably in excel sheet). This will come in handy as part of the documents a lender would ask of you, to see how good you are with managing money. While it’s a good idea to keep track of your credit score, focus less on your actual score, and more on improving it as best you can.
2. Keep Credit Balances Low
A lot of people fall into the trap of overspending using their credit cards simply because they can. In Nigeria, credit cards are not rampant yet, but still people tend to spend their salaries even before they receive it, thereby using all the money to pay debt when it finally comes in. This sort of irresponsible behavior can lead to missed payments, increased interest rates, and decreased credit scores.
On the other hand, using your credit cards only for expenses that will immediately be paid off will show creditors that you are responsible with borrowed money, and they’ll be more likely to offer a loan in the exact amount you’ve asked for. A good rule is to keep your balances under 30% of your maximum; this shows lenders you have restraint, and will also give you small room in case an emergency arises.
3. Pay Your Balances on Time
Piling up your bills will intimately result in a low credit score. Well, it doesn’t matter if you’re a day late, or 29 days late: if you’re late with a payment, it’ll immediately be reflects bad on your credibility. If you’re not sure you’ll be able to pay off your debt, don’t bother getting the loan.
4. Take Care of Small Debts
Credits and loans should only be used to make purchases that you’ll be able to pay off in the near future. You should never use a credit card simply because you don’t feel like “actually” paying money out of your pocket at that very moment. Lenders might ask a person or two whose done business with you in the past about your attitude towards debt, and if you haven’t been faithful in little debts it would obviously ruin your chances of getting a huge loan.
5. Flaunt Your Good Standing
It’s possible to request that certain loans be removed from your credit history once they are paid off. However, doing so will usually end up doing more harm than good to your ability to receive a loan. It’s OK to tell your bank/lender how you paid off a car loan in full in the past. How you made the monthly interest payments on time, and even paid it off quicker than you had planned. It’s good you let them know how credible you are with paying back loans, because that is a good way to assure them that they wont be loosing anything by lending to you.
6. Show Evidence That You Can Multiply Money
If you have never handled a hundred thousand naira, how can you convince a bank to give you one million naira? They need to know you can manage, multiply and refund their money with the appropriate interest within a time frame. So while you’re waiting for the loan to be approved, start off something with the little money you have saved, so that when your lenders ask for past evidence of successes with money management, you can boast of your already working business.
Finally, when getting a loan, always forecast on how and when you will pay back the money. Also, include a plan B payment scheme just in case the borrowed money sinks into the business and fails to yield as much profit as expected. Investors, do not take failure as an excuse to pardon a debt. Business is business and not an emotional test run.