This article continues from last week’s discussion on essential factors, aside from being a good and transparent partner, that customers need to consider when seeking financing from banks. In this installment, we will highlight common pitfalls to avoid during the financing process.
Customers must ensure their businesses are compliant with all legal requirements, which includes obtaining valid business licenses. Different sectors, such as hospitality, fuel, or healthcare, may have additional regulations that must be met for financing eligibility.
Tax returns, along with Electronic Fiscal Device (EFD) reports, play a crucial role in providing banks with accurate insights into a business’s financial health. Tax clearance must be secured before any financing can be considered.
Transparency regarding the type of collateral offered to the bank is critical. While collateral is necessary for securing loans, it is often regarded as a last resort after evaluating other financial factors.
Banks require collateral to protect their investments if customers default on their repayments. This is because financiers prefer not to liquidate customer assets, reflecting poorly on their lending decisions.
During over 13 years in the banking industry, it has been observed that only 2-5% of loans result in the auctioning of collateral. In most instances, asset sales occur only after loans have been classified as non-performing.
Regulatory bodies mandate collateral to protect the interests of depositors and shareholders. Banks typically offer facilities worth less than the collateral’s market value to further secure their lending practices.
Customers should anticipate receiving approximately 50% of their collateral’s assessed value as financing from banks. Recognized professional appraisers determine these asset values, which must be validated by government authorities.
This conservative evaluation approach accounts for potential fluctuations in asset values over time. The government safeguards customer interests; if collateral is sold for more than owed, the excess amount is returned to the customer.
Common forms of collateral include formalized landed property with titles, typically for larger loans. For smaller financing amounts, such as between Sh10 million and Sh20 million, alternative documents like local government sales agreements may suffice.
While some banks accept third-party titles as collateral, others require close personal relationships, like familial or spousal ties. In corporate scenarios, collateral can also come from shareholders or company directors, with some institutions accepting third-party guarantees.
Other accepted collateral forms include cash deposits in banks and stocks of merchandise. Additionally, customers may utilize credit guarantee schemes established by banks with reputable institutions, usually involving a nominal fee, though these often require supplementary collateral.
Credit insurance schemes provide another avenue for collateral. Customers enter agreements with insurance companies and pay premiums, but such guarantees typically do not cover the full financing amount, necessitating supplemental security from the customer.
In the upcoming final installment of this series, we will address what customers should steer clear of when pursuing bank financing and provide concluding insights.
