In Nigeria, bank loans are a very useful instrument for the expansion and viability of enterprises, especially because our culture is not particularly focused on credit. It’s critical to realize that getting a bank loan in Nigeria does not always indicate that a person or company is having financial difficulties. When used properly, a loan can really be a very effective tool for raising funds and growing a firm.
A correctly obtained loan can be an excellent instrument to accelerate the growth of a business. There are many different loan alternatives available, each with its own unique characteristics, ranging from short-term loans with low rates of interest to long-term loans having higher rates of interest.
Securities For Bank Loans
A guarantee or safety net for the bank to hold onto, which serves as reassurance that, in a case of the borrower’s inability to pay back the loan, there’s something to come after for the settling of the loan, is required before a bank approves a loan to any party. This type of guarantee or safety net is known as a COLLATERAL.
The collateral normally continues to be in the possession of the borrower after a loan is approved; however, in the event that the borrower fails to repay the loan in accordance with the terms of the agreement, the Bank may be able to sell the collateral and utilize the proceeds to pay off the debt.
Categories Of Collateral
Given the growth of Nigeria’s banking sector, a variety of items can be used as collateral for bank loans:
-
Real Estate
This can include undeveloped property, buildings that are still under construction, or completed structures. In any case, the Bank will usually dispatch Surveyors and Estate Valuers to examine the property and verify that its worth is sufficient to guarantee the loan amount.
-
Goods
Borrowers who are involved in the manufacturing, importing, exporting, trading, or general large-scale dealing of goods may use those items as a security for bank loans.
-
Private property
This category includes actual assets different from real estate; vehicles, household appliances, and additional private assets of a logical worth, and these are mainly used to secure small loans.
-
Cash
Although it may seem counterproductive, a borrower may decide that, despite having money in his accounts, he would rather take out a loan. Cash is a valid type of collateral, and in the event of a borrower defaulting, the bank may use the cash to offset the loan amount. This could be the result of certain benefits he receives from holding those funds in his accounts.
-
Equipment
Valuable equipment may be used as collateral for bank loans when a borrower uses heavy-duty machinery, plants, and equipment; this is especially true for manufacturers, service providers, and employees in the oil and gas industry.
-
Investments
Securities that are approved for bank loans include stocks and shares; a person with valuable investments may utilize them to obtain bank loans. Before the Central Securities Clearing System (CSCS) was established and the Nigerian shareholding system was digitalized, borrowers wishing to use shares as security had to put the share certificates with the bank. Now, all that is required is for the parties to request that the CSCS transfer the impacted shares into a secured lien account in the bank’s favor.
RECOMMENDED:Â10 Things To Be Aware Of Before Applying For A Bank Loan In NigeriaÂ
Loan Records
All of the documents that both sides (the Bank and the Borrower) use to define the terms and circumstances of the loan transaction are collectively referred to as loan documentation. This includes all of the documents that specifically address the loan’s guarantees and collateral. Any one of the following options could apply here:
-
Offer Letter
The offer letter is a paperwork from the bank that outlines the terms and circumstances that will govern the loan transaction. If the borrower signs the letter and the terms are acceptable to him, the agreement becomes legally enforceable.
An offer letter for a bank loan outlines the borrower’s information, the loan’s purpose, its length, the kind of security advanced, the terms of repayment, and any other relevant provisions.
-
Legal Mortgage
The borrower can be obliged to sign an official mortgage in the bank’s favor if he utilizes real estate as security. The Bank’s stake in the property is then properly recorded, and this legal mortgage has been registered at the Lands Registry. Although the bank does not instantly become the owner of the property, it does have a number of options if the borrower defaults on the loan, including selling the property.
Another option is a Third Party Legitimate Mortgage, in which the borrower is given the benefit of a mortgage created in the name of the Bank by a third party who owns the real estate. In this case, the property is not owned by the borrower, but in the event of a default, the Bank may utilize the property to make up for the loan.
-
Personal Guarantee
This is a written statement endorsed by an individual acting as the borrower’s surety.
By signing this paper, the surety agrees that, should the borrower default on the loan, he (the surety) could be held personally liable for repaying the entire loan amount or, in the case of a personal guarantee, the amount for which the surety has assumed responsibility.
-
Debenture
A Debenture is a type of collateral that lending organizations can use. In support of the lender, the borrower places a charge on its assets. This indicates that the lender has been granted an interest in one or more of the borrower’s assets. Should the borrower fail to make payments as agreed, the lender may pursue the asset and use the revenues to pay off the loan.
There are two different kinds of debentures: floating charges, which are usually formed for non-constant securities like shares and inventories (i.e., assets whose value may fluctuate over time) and fixed charges, which are created for identifiable and physical property like land and machinery. In case of a borrower default, a floating charge could become fixed.
Another option is a debenture known as a Fixed & Floating Debenture, which combines the characteristics of the two debentures previously mentioned.
-
Stock Hypothecation
Importers, exporters, manufacturers, and wholesale distributors are among the people who usually employ this strategy when dealing with big volumes of goods. In order to secure the loan, the borrower pledges his possessions, or “stock,” which the bank may seize if the borrower defaults.
-
Letter of Lien/Set-off
When a borrower wants to generate an interest in any of his assets in favor of the bank, this is employed. The borrower only needs to sign a letter granting the bank the right of lien towards the designated property. It could be deposited into a bank account or any other asset owned by the borrower.
A borrower who wishes to use funds in his bank account as collateral for a loan may also sign a paper entitled “Authority to exercise the right to lien and offset over payments with the Bank.” This allows the Bank to immediately deduct any money accumulated by the borrower from any deposit made into any of his bank accounts.
-
Irreversible Standing Debit Order
Using this form, a borrower grants the bank the “order” to take a specified sum from an account and use it to pay back the loan. By using such standing order, the borrower gives the bank permission to debit the customer’s account at predetermined intervals (often monthly) until the entire loan amount is repaid.
-
Negative Pledge
In this instrument, the borrower, which is typically a firm, guarantees that he won’t obtain a facility from a different lender using the same collateral that was used to finance the loan in issue as long as the loan facility remains in place. In essence, this safeguards the collateral’s interest to the lender.
-
Joint Memorandum
This document, which is used to secure shares as collateral, is signed by the borrower and the bank. The shares to be used as collateral are listed out and thereafter forwarded to the Central Securities Clearing System for additional processing. In addition, the shares are transferred by the CSCS into a Designated Lien Account in the lender’s name; this transfer requires the borrower’s written consent.
-
Trust Receipt
This is usually used to merchandise. This gives the Bank title to the items, which the borrower is nevertheless understood to be holding in confidence for the Bank even though the assets are in the borrower’s physical possession. The ownership right to the items reverts to the borrower upon loan repayment.
These comprise the majority of the documentation that one could come across when applying for a bank loan. Although the essential meanings and implications regarding these loan collateral agreements have been outlined in this article, it is crucial that anyone looking for a loan from a bank have a lawyer examine the documents to make sure there are no harsh terms or conditions that could harm the borrower.