These factors are referred to as Cannon of Lending. They guide the leading officer to avoid bad debts. When prospective borrowers approach his bank, the credit officers consider the following.
a. Purpose of lending: This will help to determine if the loan is bankable. Bank does not financing gamble.
b. Amount to be borrowed: It is necessary to determine the actual amount needed to finance the project.
c. Length of period of the loan: In this case, matching principle is observed, short term fund is used to finance short term credit, long term loan is used for long term project.
d. Mode of payment: Loan is an accommodation granted only for a while; it has to be repaid back to the lender. Business proposal bas to stale if the loan will be paid lump sum or installmentally and as at when it will be paid.
Apart from these factors stated above, lending officer is also guided by what is referred to as 4Cs of Lending.
- i) Character
- ii) Capital
- iii) Capacity
- iv) Collateral
i. Character: The lender should be able to attest to the integrity of the borrower. Status enquiries on the borrower will help.
ii. Capital: No institution will lend more than the authorized capital of a company. The principle or partial contribution, where the promoters and the lender sponsor a project is advisable.
iii. Capacity: Law forbids lending to minors or incapacitated individuals such as lunatic or anyone whose sanity is in doubt. The Memorandum of Association of a company contain the object clause, loan given should be in line with operation of a company.
iv. Collateral: This is what the bank or lender fall back on to recoup its money should borrower defaults. This takes care of the unforeseen circumstances that can develop after granting the loan.
How A Borrower Can Evaluate A Good Loan Facility
Before an entrepreneur takes loan facility he needs to consider the following factors.
a. Availability: Entrepreneur needs to know which sources and types of loans that is available and relatively cheaper to access.
b. Cost of the loan: The interest to be paid on loan should be less than return on investment or else the entrepreneur will incur loss.
c. Risk: Default on the part of entrepreneur erodes credibility. The only money sourced with minimal risk is equity capital.
d. Flexibility: Entrepreneur needs to consider if the loan will not choke his financial flexibility.
e. Control: Entrepreneur should reject loan that will affect his control of his business.
It is only when all these factors are considered and judged to be in favor of entrepreneur that loan should he taken.