I constantly am getting request from pharmacist seeking for loan on what they need to do to make their collateral acceptable to the banks.
I client of mine recently got a loan of 70 million naira to expand his business from a Nigerian bank. A lot of people were amazed that he could get such loan in this trying times. What they fail to ask is the reason why the bank will grant such a loan even when the pharmacy business owner did not have a wonderful collateral to offer them. Well, the reason is very simple and you must understand it when seeking for loan in Nigeria.
Banks are not interested in your collateral when making loans to people seeking for loan. The most critical factor that banks look at in advancing loans are your business EBIT for at least five years.
EBIT means your earnings before interest you are supposed to pay and taxes. Your bank will look at the profit your business makes before your pay interest on the loan and you pay your taxes. This means that if the gross profit of your business is consistently very high over a number of years, you have a better chance to get a loan from the bank.
This means that you must have evidence that your business is very profitable. This evidence can only be seen through your business historical financial records.
You must understand that banks are businesses seeking to make profit. They make their profit from the interest they charge you when you take a loan from them. This means that they can only make profits from businesses that can easily make enough profit to cover the interest the loan will be generating.
For instance if you are seeking for a loan of 1000000 naira and the banks interest rate is 20%. This is equivalent to N200,000.00 per annum. The banks interest will be covered if your business EBIT per year is above N200,000.00 The banks know that its only when your profit is significantly above N200,000 that you can pay them their interest which is their source of revenue.
This means that the bank’s major area of interest is not the collateral you are giving them but your business EBIT.
The bank will start to ask you for crazy collateral when your gross profit can not significantly cover the interest.
What this means is that you need to understand your business numbers very well when seeking for loan
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