One of the worst fears of a business owner is the inability to secure funding to invest in their business. Access to cash for investing makes all the difference to the success of any business. For many small and medium enterprises (SMEs), there is a strong dependence on banks and other financial institutions for business loans. Even individuals who need a large amount of money to power a project can decide to take a loan.
It is easy to apply for a loan in any of the commercial banks in Nigeria, as well as other lending institution. However, the success of your loan application is not as easy or automatic. A loan application can be denied for various reasons, and we shed more light on these reasons so that you can eliminate them to increase your chances of getting a loan.
Bad Credit History
One of the first things a lender does is to check your credit history. It is a report of all the previous loans that the applicant has taken in the past, and an analysis of how they were repaid. A lender wants to know how many loans you have, before giving you another. However, a lot of Nigerians do not realise that that their history will be checked to determine if their application should be granted or not. So, when a loan application is denied with no reason, it is typically advised that you check your credit history to be sure that you do not have any loans that you have defaulted on.
Even though there are commercial banks and lending houses that now provide loans without collateral, secured loans are still a popular trend in Nigeria. Putting down a collateral that is deemed insufficient by the bank, compared to the money you want to borrow, is another way of being denied a loan. Imagine that as a lender, someone applied to borrow a million Naira from you. Would you accept a collateral worth N10,000 naira? If the person were to default on payment, the collateral will not recoup the money borrowed.
Standing As a Loan Guarantor
If you have stood as a guarantor for someone who applied for a loan, and the person was unable to repay, it may affect your own loan application. As a guarantor, you have signed a credit agreement to repay the loan should the borrower default, so this is essentially seen as your debt too. A lender that has seen in your history that you stood as a guarantor for someone that defaulted will be wary of giving you a loan.
A bank is in the business of giving out loans so that they can make money for themselves. If from your application, a lender can see that the returns on your business may not be sufficient to repay the loan, they may deny the application. This not to say that you should submit false projections of your business’ finances, or your own personal account statement. Rather, this shows that if you apply for loans that are deemed too large for your capacity, it may not be approved.
Your account balance, salary or business profit statement may not be low, but your loan application could still be denied if the lender decides that you currently have too many loans outstanding. This is a risk management decision for the lender. Repaying all your loans is your business, but the lender knows that when someone has too many loans running at the same time, it may be difficult for them to prioritise their repayment, and prevent the lender from getting its money back.
All of these reasons may not be clear to an applicant at the point of rejection because these were not a criteria that they expected. Nevertheless, if they are important to lenders when determining if to give a loan, then a borrower should put them into consideration before applying for a loan.
Have you been denied a loan in Nigeria, for reasons other than these? Join the conversation with us on Twitter (@CRCCreditBureau) and Facebook (CRC Credit Bureau Limited)