Your Business And Your Bank

Choosing the right bank is a critical decision when starting up a business. Businesses need an efficient, business-friendly account provider who will give the business plenty of support, adequate loans, business tools and helpful advice.

While many businesses find it difficult to survival due to lack of funds, investigations revealed that it is either those enterprises do not really explore all the services accruable to them through financial institutions, or that the banks themselves are not performing their responsibilities.

A large number of transactions take place outside the financial sector industry. Some businesses still do not know that having bank accounts for their businesses and working with the financial institutions can actually make their businesses less stressful and even provide opportunities for them.

Banks are financial institutions that accept deposits and channel them into lending activities, either directly as loans and advances, or through the capital market. They are the intermediary that is put in place to connect customers that have capital surpluses with the ones that have deficits and are in need of some financial aids.

Infrastructural deficit

In the meantime, the President, Association of Senior Staff of Banks, Insurance and other Financial Institutions (ASSBIFI), Sunday Salako, said banks cannot give their best to growing businesses in Nigeria until certain factors are put in place.

“Certain factors cannot allow banks trust businesses enough to support them, especially financially. A key factor is power. Until power is addressed, and there is regular power supply, banks would remain reluctant to lend,” Mr. Salako said.

He added that “until infrastructure is addressed, and we have good roads, good transportation system, banks would remain reluctant to help. This is because these factors increase the overhead cost of producing here in the country, thereby making local products more expensive than their counterparts imported from other producing countries.”

According to him, the cost of production would be high and because of this, such goods would not be able to compete in the market with the imported ones. “If a bank lends you money and you cannot pay what will they do, because they also have to get their money back? How many businesses would they have to start auctioning to realise their funds?” Mr. Salako stressed. He added that another reason why banks are not lending is policy summersault.

Inadequate collateral

Leverton Adetola, a financial consultant with banking experience, said banks are meant to give out loans to aid businesses, but they sometimes are not willing to do so if the customer does not have the adequate collateral to cover up for risks security.

“Some customers do not have any form of security at all; no form of collateral to back up a loan application. Banks might therefore not be comfortable with the circumstances surrounding those businesses; hence they will not be willing to finance such,” Mr. Adetola said.

According to him, accepting collateral of perishable commodities is a big challenge for the banks, and some businesses tend to present such as collateral.

High interest rate

Businesses on their part are sometimes reluctant to even go to their bank and ask for a loan because of the high interest rate on loans in Nigeria.

Mr. Adetola explained that “interest rate is a function of the interest paid on fixed deposit,” adding that “banks get money to lend out through money fixed by people. Now, if you have a fixed deposit with a bank, and let’s assume it was fixed at 11%, it means the bank must make money at a higher interest rate, let’s say 16%. So the higher the interest rate on fixed deposit, the higher the interest rate on loans and vice versa. If the CBN can direct that the maximum rate on fixed deposit is three per cent, automatically interest on money lent by customers will reduce and the customer would be encouraged to borrow money.”

While more findings revealed that most commercial banks do not want to give loans to start-ups, available data from the Financial Derivatives Company, an economic research firm, however shows that hope is in view as “credit to the private sector grew by 11.31 per cent to N14.21 trillion during the first quarter.”

Financial experts believe that despite the infrastructural deficit pointed out as reason why banks are not lending, there are available funds in the financial industry that are budgeted for the Small and Medium Enterprises (SMEs) in Nigeria. The Central Bank of Nigeria classified the SMEs as enterprises with a maximum asset base of N500million, excluding land and working capital.

Intervention fund

In 2010, the Central Bank established a N200billion intervention fund for the Small and Medium Scale Enterprises Guarantee Scheme (SMEGS) with the aim of promoting access to credit by SMEs in Nigeria. But as at July, 2012, the CBN Director in charge of Development Finance Department, Paul Eluhaiwe, said that the Central Bank has only received 19 applications for the N200billion SMEGS.
Mr. Eluhaiwe stated that “19 applications valued at N960 million have so far been guaranteed under the scheme as at March 2012.”

Experts advised that companies seeking funds must have operated their businesses for a period of time, as some banks would demand to see your cash flow statement and your certified audited accounts for two years.

They said this is necessary because an average commercial bank will tell you that you are just starting the business. As such, they are not sure about your business. Banks would rather lend to people who have already made their money; who are already in business, with the view that they are more credit worthy.