The Criteria Of Borrowing And Repaying Business Loan As A Guide Towards Economic Development

THE CRITERIA OF BORROWING AND REPAYING BUSINESS LOAN AS A GUIDE TOWARDS ECONOMIC DEVELOPMENT. (A CASE STUDY OF FIRST BANK PLC.)

Among all other activities of the banks, lending is the most vital banks undertaking which should be carefully emphasized, may be because it is the most profitable undertaking of the banks or its contribution to the economic growth of the country generally.

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On the other hand, borrowers put their faith on the commercial bank towards the borrowing of business loan whenever they are desperately in need of funds.

Al almost all business owners borrow money from time to time.  But to be a reasonable and successful loan applicant you will need to convince a lender that you are  a reasonable risk bearer.  You must explain how you will use the money or loan, how much you need to borrow and you will repay it.

Generally, business owners borrow to finance a start up, an expansion of facilities or the purchase of another company.  But regardless of why you went to borrow lenders  always want to minimize their own risk.  They (lenders) will not lend you money unless you are able to convince them that you will be able to repay the loan.  Searching through related literature on the question of borrowing from commercials banks, one finds a two dimensional approach to the problem.

There are those who totally stress on rigid application of the principle of borrowing loan, and there are those advocate that the principle of borrowing loan should apply but not rigidly.

Firstly bank of Nigeria has its own criteria when over they went to issue out loans to its customers.  They use the term “paper charms” in assessing their customers involved. In this terms “PAPER CHARMS”. ‘P’ stand for the purpose of the loan.  The banks should ascertain the purpose of the loan.  This is important because the bank has to follow some specific internal and external operational policy guidelines while  lending the purpose of the loan must not be   illegal, this is because illegal contracts are void contracts in law.  Therefore money land under illegal contract or business are not repayable the lending institution should ascertain whether the requisition is in the performed or less preferred sectors of the economy. The bank must  follow the government guidelines in considering the sector to which the proposed loan belong.

‘A’ stands for the amount to be borrowed the borrower  will have a certain amount which he intends to borrow in mind.  The bank should do its independent calculation to check the adequacy of the amount sought if the amount sought is insufficient, the proportion has to be reconsidered because inadequate funding may lead to incomplete and abandoned  project.

Conversely, if it is higher than the financial need of the customer, the lending should be turned down because over lending may lead to misappropriation of funds and consequently difficult in repaying.  The borrower will submit a cash budget. Also the memorandum and articles of association of the business have to be submitted to determine the borrowing powers of the directors.

‘P standard for the period the loan will last This refers to how long it will take the customers to repay the loan.  A careful examination of the proposed is important because the bank will be in a better position to determine whether the loan a long term or  short term loan.  If the customer request a short term loan which he will apple in acquisition of a fixed assets, the duration of the loan may be considered inadequate because the period may not be sufficient for the asset to generate enough fund for repayment.

Financial long term projects with working capital usually makes a debt doubtful and in some, causes bad and irrecoverable debt.

‘E’ stands for exchange. This is the rate of exchange as at the true when these loan is granted and the rate it will be during the repayment period. In this situations the bank makes use of time value of money to ascertain the present value of each naira given out in form of loan as against the future value of such naira.

‘R’ stands for the rate.  This I also know as the term of loan.  It varies considerable from one bank to the other and from one period to another period. The interest rate charged  by most of the commercial banks is 5% – 10% or depending on the type of activity of the borrower.

‘CH stands for character.  The character of the borrow is of paramount important for this will prove whether the loan is to be granted in his favour. Not if the person in question is of dubious character, his change of receiving the loan is zero but if he is of good character, he stands  the chance of getting the loan.

‘R’ stands for repayment programs. The repayment of the advances should come from the income generated form the project. The sources of repayment must be realistic and envious.  Where an individual wishes to borrow.  In order to access his proposition or statue, the manager should ask for details of his earning and expenditure.

The bank matter the two variables with the view of finding out if the proposed can repay itself or not.

For business enterprises, the advances should be repaid from the future profits. the bank has to ensure that lending is a profitable one before embarking on it.  The lending 9bank) will ask for the following financial documents which will guide him in analysis the proposal

1. A cash budget
2. Projects profit and loss account
3. Projected balance sheet.

‘m’ stands for mandate.  The mandate of the person involve and the profitability of the investment he wants to carryout is of paramount important to the lending banks.

‘S’ stands for security. This factor is considered last security is what the bank will fall back to if all ones considered fails to work according to expectations and repayment becomes doubtful.  The following securities are acceptable to banks for  lending land, insurance policies, stock and shares and guarantees etc.

In line with those who adduce argument that the principle of bank lending be followed up strictly is Egbo. Is major, who write-up concept of developmental lending” emphasized on the factors to induce investors to be honest and prudent in their management of the business. Also the extent to which the bank involves itself in lending is determined by the nature and character of the investment or project.

Where the capital required is high, the entrepreneur who is mobilized by bank may be required  to provide some forms of collathel security as this would elicit his honest and prudent involved in the management of the business.

Moreso, lenders (bank) school not have behind their minds or envisage impossibilities or in capabilities of borrower to pay up loan rather they should critically offer protection to  borrows in the nature of adequately ensuring within all parameters that the investments upon which loans are advanced will eventually liquidate the loans without years.

Another writer co Nwadia in the some school of though in his article on “the functions of commercial banks and the Nigerian economy goes further to point out those securities which could be. Use as collateral and how they could be turned to cash in case of default on repayment by the borrowers.

Besides, Egbo 1.5 major and C.O Nwadia who are the option that collateral must be present before loans are granted in order to liquidate loans if borrowers default, there are others who have contrary view.  One of such writers is Feni Ade Kanye who himself was quoting L.C matter in his book “The element of banking in Nigeria”.  As an author and  expert in the practical aspect of banking he has advised against following lending rules and regulations rigidly.  He compares the principles of leading to economic laws “what certain a fact and other things being equal, a prescribed course should be followed’  “They are neither independent nor unbreakable “.  He further stated three basic principles on which bank lending should be laid. These are safety profitability and suitability other than collateral security emphasized by others. He equally went further to enumerate the other factors considered by bank before granting credit facilities to customers. Hey are amount, purpose of the loan, period of the loan repayment terms capacity of the business, security and the borrows integrity, honesty and reliability

2.1     TYPES OF LOANS AND ITS SIGNIFICANCE

Finance is he life blood of every successful business enterprise since a business cannot service without adequate finding. It be comes very imperative that a firm should source for fund internally and externally.  Loans can be broadly classified into two: short term loan and long term loan

SHORT TERM LOAN:

These are loans available to the firm for a period not exceeding one year and they are required for the day to day running of the business activities. It must be capable of being generated internally and externally.  Loans can be broadly classed into two: short term loan and long term loan.

SHORT TERM LOAN:

These are loans available to the firm for a period not exceeding one year and they are required for the day today running of the business activities.  sit must be capable of being generated instantaneously if their generation should take unnecessarily long time, it will not be beneficial to the user.

SIGNIFICANCE OF SHORT TERM LOAN

1. They are need for the purchase of new materials, accessories and components needed for the production of goods and services
2. Sales and distribution of finished goods are financial through the working capital
3. Salaries and wages are recurrent expenses, which the firms must meet to remain in business, short term loan is used for settlement of wage bills.
4. It provides cheap source of finance for the firm

• Interest on short term loan are a tax deductible

1. Short term loan are flexible in the side that debtors may decide to liquidate then before majority

SOURCES OF SHORT TERM LOAN:

1. Trade credit: in the ordinary course of events a firm buys its supplies and materials on credit recording the debt as accounts payable or trade credit.  Trade credit means a credit that a customer gets from his suppliers of goods in the normal course of he business.  In practice, the  buying firms do not have to pay cash immediately for purchases made, this deference payment is a short term finance called trade credit
2. Accrued expenses: they represent liability that a firm has to pay for the services which it has already received. They represent a spontaneous interest free sources of financing.  Accrual wages salaries, taxes and interest are among the important components.
3. Deferred income: it represents funds received by the firm for goods and services which it has agreed to supply in future.  These receipts increase. The firms liquidity in the form of cash.  Advance payments made by customers constitute the main items of deferred income.
4. Bank finance: banks provide short term finance to business enterprises through the following means: letters of credit, working capital loan, overdraft, bills purchasing or discovering etc.
5. Commercial paper: it is an unsecured promising note issued by firms to raise short term funds.  The  buyers of commercial papers include banks, insurance companies, unset fruits and other firms which have surplus funds to invest on short term basis’
6. Trust receipts: a rather large volume of firms funds is secured by business inventories. If a firm is a relative good credit risk, the more existence of the inventory may be sufficient basis for receiving a loan. A trust receipt is an instrument acknowledging that the borrows hold the goods in trust for the lender. When trust receipts funds from the lender, conveys a trust receipt for the goods.
7. Long term loan:

they are those loan. Arrangement which exceed one year but not more then 25 years.  They are: common stock, preference shares bond, debenture, mortgagee, venture capital and retained earning/

1. Common stock: these are ownership securities that give the holder a legal interest in the ownership and control interest that a holder has in a business translated into financial terms
2. PREFERENCE SHARES: these are compromise securities in which an investor relinquishes some of his rights as an unrestricted participant incorporate profit and acquires a prior right to a limited but seemingly assured part in the profit. They stand mid-way between ownership and debt securities and are designed for the benefits of the investor who wants priority over the ordinary shareholders.
3. Bond: it is a long-term promissory note.  It is a fixed interest security that entities the holder to fixed rate of return at agreed intervals and the repayment of the principal at maturity.
4. Debenture: it is a long-term bond that is not secured by pledge of nay specific property. However, it is secured by a ny property not otherwise pledged
5. Mortgages: this is a form of long term finance available to lend and building owners using mortgage as collateral.  Payment on mortgage usually involves the gradual repayment of the principal and interest repayment by way of annuity. The annual interest rate is tax deductible
6. Venture capital: This is a significant innovation in business finance. It implies an involvement by the venture capitalist in the management of the client enterprises. It is association with financing of high and new technology based enterprises.  Ventures capital is the investment of long term equity finance where the venture capitalist earns his returns primarily in the form of capital gain etc.

FACTORS RELATED TO BANK LENDING:

1. NEATNESS: a loss application that is neat and tidy immediately stimulates the interest and attention of the loan officer. Tidy works reflects a serious and organized effort and makes for easy readings.  The qualities create a first good impression of the management and indication of good house keeping or record keeping on the part of the borrower

Untidy presentation causes irritation, lack of interest and concentration on the part of the loan officer.

2. ORDERLINESS AND SEQUENCE:

The orderliness and sequence of information and presentations the logic by which the loan officers attention is gained and retained. First things should come first and priority should be given to the most important subjects. For example an enterprise seeking for a loan should first introduce itself, its past, present and future in a big biography otherwise called “company profile”.  Sits past and present should highlight amounts to its products/services lines and statement of source and application of funds, sits profit and loss account and balance sheet.  After presenting a brief biography of the borrower other subject in the proposed such as project description promoter’s biography management and other should follow. In other of importance.  The data and information should flow one to the next and the reader should be left in no doubt, it is indeed organized.

3. Knowledge of the business

A loan proposal must show that the borrower understands the proposal must show that eh borrower understands the proposal that it is clearly manifested in every section of the proposal. Clear descriptions backed up with data, drawings referable, illustrations, photographs, companies and other document will go along  way to establish this fact and substantiate the proposal.  A meticulous approach to details, calculation, dedication and a conservative and articulated reasoning and conclusions, all lead credence to the loan officers impression that the borrower is well informed about the business for which he is seeking.

4. Other factors include; character of the loan seeker, and his capacity of past and present event, capital, purpose of the loan amount sought by the customer, collateral stability and repayment scheme.

• THE ELEMENT OF GOOD BANKING ADVANCE

The main elements concerned in creating a good advance are as follows;

1. The integrity and reliability of the borrower; The money  being lend is that of the deposits and shareholders of the banks and every endeavor should therefore be made to avoid bad debts.  The whole success of lending will usually depend upon the time representation of the facts by the customer and upon his ability to carry through any scheme to a satisfactory conclusion
2. The nature of the proposition: This is of paramount importance. Is it a banking proposition? Short term advances are favoured and desirable, application arise for working capital, seasonal  needs and of – year- tax payments, bridge over facilities etc.  advance for fixed assets will usually only be entertained if a firm modern term repayment can be arranged

• The amount to be borrowed: Often, the customers will have exact amount in mind.  A separate calculation should be made so check whether this amount is correct if the amount asked for is insufficient, the proposition need to be reshaped. Conversely if the amount asked may be beyond that which the bank is willing to lend, however, it may be possible to agree a reduced advance if the customer corporation in expanding the business more slowly or bring into his business some additional capital or long-term loan

1. Ability to apply the advance to the stated purpose: before agreeing on advance, the banks must be confident that the customer has the ability to carry out the proposition.  If the loan is not used for the stated purposed, loss could result to the bank. The customers personal integrity should be beyond question and they must be hardworking and industrious

THE REPAYMENT PROGRAMMES:  short term repayment are normally required.  But, where will repayment come from?  The source must be obvious.  In this respect, self liquidating advance are favored. Before agreeing to a medium term advance, the repayment program should be seen to be realistic.  But will the bank be happy to extent the payment programme if repayment falls behind.  Was a long-term advance really required from an institutional increasingly becoming more involved in longer term lending.

1. Security: Every good proposition should stand on its own lie ignoring the security aspect..  however, most proposition entail risk and often this is such that bank will grant the advance if it is sufficient secured so that loss will be avoided should proposition or the customer fail.  Security will also certainly be required if after valuing a customer’s balance sheets assets on a “going concern “ basis the bank would be at risk as an unsecured creditors.  When taken security should be of adequate value and preferably be easily realizable

• PURPOSE OF THE LOAN

Although commercial banks were given broad statutory power to issue loans for practically any private economic undertaking, they all imposed restrictions on the kinds of loan they would support. Certain projects were judged to be of low priority and were therefore excluded for a variety of over lapping., and sometimes even conflicting reasons.  Most business excluded as priority fall in to one of the three categories, those considered likely to fail those considered not needful of loan and those considered un important to the nation economy.

Some of the projects that was judged to be of higher priority such as agricultural loan, small scale business loan,  industrial loans and manufacturing loan. The terms of loan varies considerably form one bank to the other and from period to period. The interest rate charged by most of the commercial bank is 5% – 10% depending on the type of activity of the borrower.  There was also considerable variability  in the duration of loan.  The bank should ascertain the purpose of the loan.  This is important because the bank has to follow some specific internal and external operational policy guidelines while lending.  The bank must follow the government guidelines in considering the sector to which the proposed loan belong

• THE SECRETS OF REPAYING LOAN

As more and more loadable funds are being made available to the borrowing public and as more lending and credit institution are coming into the market, it is to be expected that loan defaults will be on the increase.

The principal causes of loan default have been identified as follows:

1. Over-borrowing: Borrowing beyond the needs and capacity of a firm will likely do more harm than good to the firm. Over – borrowing breeds a tendency of direct funds to high risk investment, unproductive investment or even philanthropy. The firm founds it difficult to generate sufficient fund to serve the heavy debt burden
2. A poor attitude to payment:
3. Unwillingness to pay: same debtors deliberately do not wish to pay their debts even when they have the money
4. How priority on servicing of loans: several debtors do not consider it important to service their loan

• Poor management of the financial resources of the firm principally indiscipline in the utilization of funds

1. Inefficiency in the total management of the firms. This is caused by inadequate management skills
2. An unstable economic environment: frequent policy changes even when they are meant well, end up disorganizing and strangling firms
3. Lack of infrastructure support measures for the lending industries to pursue their debtors e.g bankruptcy law

The secrete of repayment loans are based on four fundamental, economic moral and common sense truism namely:

1. Hard work: hard working is an essential ingredient to achieving success. An individual who does not work hard should not expect to be successful unless he is lucky or applies fraudulent methods.
2. Savings: savings is important for future investment. Savings equals investment in an age did economic claw, savings is equally important for difficult times achieve.  Anyone who consumes all he earns will likely turn into a debtor.  Be a producer not merely a consumer.  If one does not serve, one cannot invest and if one cannot invest, one can hardly achieve success.

Any investment made by one equal

• PROVIDE FOR THE WELFARE OF THE SOCEITY

One works to live, therefore it is a  fundamental necessity that one should from his earnings or profits, provide adequate maintenance for his family to the extent that his earnings could support.  In this regard common sense should guide one to determine how much of ones earning should be spent on the maintainable of family.  This is to say that a debtor must be able to maintain (feed, cloth house) his family while paying his debts.

1. Plead with your creditors and pay back: A debtor should pay his creditors once the repayment data is over due and other debtors facing difficulties should “pleaded” with his creditor if he is not able to pay off right away but he smut draw up a plan on how to pay back has debt and reach an understanding with his creditor.  He should endeavour to keep to his time schedule with his creditor.  If he earns extra income profits or he is “lucky’ he should appropriate the extra wind fall to benefits his creditors, his savings and his family

a debtor who follows this six-points approach will surely pay off his loan or debt and be income self-sufficient if not rich:

1. Manage he firm/your business efficiently
2. Manage borrowed money efficiently
3. Do not borrow more than you need
4. Always budget/plan your case spending
5. Do not forget your creditors
6. Payment of debt should always be one of your priorities.

• THE ROLE OF BORROWIN AND REPAYING BUSINESS LOANS IN THE NATION ECONOMY

Government controls commercial banks activit6ies through the monetary policy issued by the central bank and ad such direct bank lending to those sectors which contributes to the development of the country economy.  Bank lending serves as a weapon to government as regards her economic development.  As such government should as much as possible encourage bank lending by relaxing some of her rigid roles which reduces banks ability to lend money out to the public

Once the criteria of borrowing and repaying business loan in the aforementioned area is being carried out successfully and efficiently, it will play the following role I  the nation economy.

1. FULL EMPLOYMENT:

In Oma Willians states that one of the fore most objectives of government in her monetary policy.  Full employment may be considered as a situation in which employment cannot by increased in effective damned and unemployment does not exceed minimum allowances that would be made for the effects of frictional seasonal factors. This occurs when bank lend money out to her customers either for new business or for expansion of already existing one and customer in term repay back the loan.

1. Price stability: Price stability is ver important in any given economy. When bank customers borrow loan like agricultural loans, commercial loans, manufacturing loan etc and they were able to produce goods in all their endeavours, the price of goods and services will be cheap and this will tend to maintain price stability because there will be many buyers chasing many goods.

• Economic growth: this can be defined as the process whereby (W.  Oma Williams) the real per capital income of a country increased over a long period of time. Economic growth is measured by the increase in the amount of goods and services produced in an economy.  Economy growth implies raising the standard of living of the people and reducing inequality of income distribution when every body tends to be productive because of their borrowing capacity from the banks and the return they get as a profit for making use of the    These means that borrowing and repaying business loans stimulate economic growth

• DISTRIBUTING BANK SERVICES:

The channels of distribution for banks services should be thought as any means used to increase the availability and convenience of the service that help to maintain existing or bank users or increased their use among existing or new customers in disgusting financial services, first bank of Nigeria plc employed number of channels:  bank branches credit card, banking by mail and in shop branches.

This is the most important channel of distribution and in certain instances some banks regard the location of bank branches to be synonymous with distribution since branches are relatively fixed in location they must be conveniently situated.

This is what is expected in the rural area where most of its dwellers are farmers to encourage customers from obtaining agricultural loan which is predominantly.  An such it is important to define a branch trading area as that geographical region in which it can conveniently serve potential customers and from which the largest portion of the business will be generated.

Bank credit cards: this is a means through which a bank offers its credit services to the users. Banks credit cards have enabled banks to overcome the  factors of inseparability by offering credit to customer for outside their immediate trading areas.  It has also promoted the increasing use of the banks services by existing customers as well as establishing contracts with a wide variety of traders and persons who may not otherwise use the service

BANKING BY MAIN: By using the facilities provided by the post offices who acts as middlemen.  The method increase the availability and convenience of the bank  service as well as possible expending the geographic are within which it can operate

In-shop Branches: The use of shops as bank agents as employed by some banks, especially in Britain and in Nigeria like the one obtainable in institute of management and technology Enugu where some banks to pay in their school fees and other charges.  This is another means of effectively distributing bank services.

Bank customer relations extent beyond the normal press relation activities of informing customers through the mass and specialized media about new product, services, change and improvement, new uses price changes publicity.  Bank should educate her customer on how to borrow loan and how to service such loans  they should also engage their customer in management consultancy service in which  the customers will be informed on how to manage the available resources at their disposal to avoid economic waste.

On consumer instructions and education rebutting in greater satisfaction and on company response to customer in the country. These institution complete with the banks for financial services.  They often pay higher interests on their deposits than the banks.  Also the process of obtaining funds from these informal financial sectors is Usually less rigorous  than the  process involved in the banks.

iii.      Inadequate number of or uneven distribution of bank offices:  The bank branches tend to concentrate on busy commercial cities at the expense of the rural area. Since these banks are not equitably distributed the people in the rural areas find it difficult to have access to the bank’s services

1. Poor credit habit: in the country people prefer to carry out their business on cash basis. The use of cheques, bankers drafts and other credit instrument is not very popular in the country.
2. Uncooperative attitude of source bank employee some employees of banks are very un-friendly with their customers thereby making their customer to obtain financial services with difficult
3. High lending rate: The rate at which banks lends money to investors is usually considered high ins relation to what the investment will  yield

vii.     Stringent security requirement:  almost all the banks demand securities before lending.  Some intending borrowers may not be able to meet up whit the demand for the bank security wise and as an alternative, they resort to the informal or local money lenders who have diluted security requirements.

Viii    To much protocols: in obtaining bank facilities, too much protocols is usually involved. There are much documents to complete, too many references required and other time consuming requirement.

MEASURES FOR IMPROVING BANKING HABIT IN NIGERIA:

The following measures are recommended:

1. The government through the central bank of Nigeria should encourage even spread of banks office in the economy.
2. Nigeria should be educated and enlightened on the advantages of suing credit instruments for setting transactions and indebtedness

• The member of banks serving the population is not adequate. More branches should be established to boast the banking habits of the people

1. The banks should develop financials services and strategies that will enable them compete favorably with informal financial market for business
2. Adequate training and education should be given to bank staff on their relationship with customers. They  are supreme and should be treated politely and not rudely.

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