Small and medium-sized enterprises (SMEs) are the backbone of Nigeria’s economy, providing jobs for millions and contributing significantly to economic growth. However, limited access to financing remains one of the biggest obstacles for many aspiring entrepreneurs and small business owners in the country. This comprehensive guide aims to demystify the process of securing loans in Nigeria to help more small businesses access the funding they need to start, sustain, and expand their operations.
Small business loans refer to financing options available to entrepreneurs, startups, and small firms to cover various business needs like starting capital, working capital, asset purchases, and business expansion plans. These loans are critical for the growth of SMEs in Nigeria which often struggle with limited personal finances and cash flows.
There are several types of small business loans offered by banks and other financial institutions in Nigeria:
Asset-Based Loans: Utilizes assets like inventory, accounts receivables, or equipment as collateral to obtain financing. Access to adequate and affordable credit is linked to higher revenues, job creation, and success rates for small businesses. It allows them to better manage cash flows, operates more efficiently, and capitalize on growth opportunities.
Eligibility Criteria and Requirements
To qualify for a small business loan in Nigeria, there are some basic requirements that all lending institutions and banks look for:
Aside from the documents listed above, specific loan types may also require supplementary materials like cash flow statements, business permits, site leases, inventory lists, etc.
Understanding credit health using CBN’s credit scoring system is also key before applying for funding. Poor scores below 500 reflecting past defaults or arrears can lead to loan rejection.
Preparing Your Business for Funding
An eligible business plan and financial position are central to securing loan approval. Here are some tips to prepare:
Choose a suitable legal structure like sole proprietorship, partnership, or private limited company based on business goals. Ensure all permits, licenses, and certificates are up to date.
Have well-documented bookkeeping with sales records, bank statements, and tax returns for the last 2-3 years demonstrating healthy cash flows.
Creating projections for the next 5 years showing a positive outlook. Include competitor analysis, marketing plan, and funding requirements.
Pay all outstanding debts, avoid excessive new credit inquiries, and ensure credit card balances are low and no late payments.
With various loan options available, it's vital to pick the most suitable financing source aligned with your funding needs and repayment capabilities:
Offer the most competitive rates but have intensive eligibility checks. Best for established businesses seeking >₦5 million funding. Top options: Access Bank, GTBank, UBA
Cater to small-scale entrepreneurs with a limit of up to ₦500,000. Unsecured loans are possible for nano enterprises.Top options: LAPO, Accion, LFDFT
Emerging online lending platforms using analytics models to offer quick short-term loans. Convenient but very high interest rates. Top options: Paylater, Renmoney, Carbon.
Compare interest rates, fees, loan amount and tenure before deciding on the most affordable financing option for your business.
Each of these funding options has its unique features and benefits, making them suitable for different types of businesses in Nigeria. It's important for entrepreneurs to carefully assess their business needs and choose a loan provider that aligns with their financial requirements and business goals. nairaCompare has a wide range of loan options you can compare and choose from.
Here is a step-by-step overview of the loan application process:
1. Determine Funding Needs: Decide loan amount based on projected financial needs for the next 12-18 months
2. Select Lender: Approach shortlisted banks/MFIs to enquire about loan products
3. Submit Application: Provide required documents like business plan and financial statements
4. Appraisal: The Bank will review the application and analyse eligibility over the next 7-14 days
5. Approval: You will receive a term sheet outlining the loan terms if satisfied
6. Documentation: Process security documents, bank guarantees, and sign agreement
7. Disbursement: Loan amount to be credited within 5 days of completed documentation
Some common mistakes like unrealistic projections, disorganized documents, and poor presentation can negatively impact your chances during the application process.
If a traditional loan application gets rejected, there are a few alternative funding avenues small businesses can tap into:
Staying on good terms with your financier also keeps the door open for additional loans for the expansion phase. Most importantly, invest capital drawn down wisely to grow your revenues. With some diligent preparation and the right guidance, small businesses in Nigeria can secure the funding required to turn their entrepreneurial aspirations into reality. Evaluate the solutions outlined above to find the approach best suited to your needs.
Accessing loans for small businesses is challenging in Nigeria but remains integral for growth and competitiveness. This guide has provided extensive details on the common loan types, eligibility norms, application procedures, and financing sources available locally. With the right business structure, financial planning, and credit health, entrepreneurs can unlock formal bank loans, microloans, government schemes, and alternative funding platforms. Compare interest rates and terms prudently before making any credit decision.
Most importantly, invest borrowed capital judiciously into avenues generating healthy ROI through sales, marketing, and operational productivity gains. This will ensure businesses have the cash flows to comfortably meet repayment obligations. Equipped with this practical knowledge, both existing SMEs and aspiring startups can now approach funding options more confidently. Wish you the very best!
Banks prefer fixed assets like property, inventory, machinery, or personal assets backed by guarantors. Some microloans up to ₦500K may be unsecured based on strong credit records.
Focus on microloans and government schemes for new entrepreneurs without financial statements. Build a strong business plan highlighting projections and growth path. Offer personal assets as security.
Rates vary from 12% to 30% p.a based on lender and loan tenure. Banks offer the lowest rates around 12-15% for established SME clients. Microloans and online lenders charge higher rates up to 25-30% p.a.
Avoid missed payments on existing loans, reduce credit card balances due, limit new credit checks, and most importantly pay all EMIs and credit dues on time going forward.
We encourage all aspiring and struggling entrepreneurs to carefully evaluate the small business funding solutions highlighted in this guide.
Use nairaCompare to compare different business loan offers before selecting what fits your needs.