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Factors to Be Considered for Grant or Business Loan

by Olufisayo

These factors are referred to as Cannon of Lending. They guide the leading officer to avoid bad debts. When prospective borrowers approach their bank, the credit officers consider the following.

1. Purpose of lending: This will help to determine if the loan is bankable. Bank does not finance gamble.

2. Amount to be borrowed: It is necessary to determine the actual amount needed to finance the project.

3. Length of period of the loan: In this case, the matching principle is observed, a short-term fund is used to finance short-term credit, a long-term loan is used for a long-term project.

4. Mode of payment: A loan is an accommodation granted only for a while; it has to be repaid back to the lender. A business proposal has to state if the loan will be paid a lump sum or installment and as at when it will be paid.

Apart from these factors stated above, a lending officer is also guided by what is referred to as 4Cs of Lending.

These are:

  • Character
  • Capital
  • Capacity
  • Collateral

i. Character: The lender should be able to attest to the integrity of the borrower. Status inquiries 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 lunatics or anyone whose sanity is in doubt. The Memorandum of Association of a company contains the object clause, a loan given should be in line with the operation of a company.

iv. Collateral: This is what the bank or lender falls back on to recoup its money should the borrower default. 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 a loan facility he needs to consider the following factors.

Availability: Entrepreneur needs to know which sources and types of loans are available and relatively cheaper to access.

Cost of the loan: The interest to be paid on the loan should be less than the return on investment or else the entrepreneur will incur a loss.

Risk: Default on the part of an entrepreneur erodes credibility. The only money sourced with minimal risk is equity capital.

Flexibility: The entrepreneur needs to consider if the loan will not choke his financial flexibility.

Control: Entrepreneurs should reject loans that will affect the control of their business.

It is only when all these factors are considered and judged to be in favor of the entrepreneur that a loan should be taken.

Photo by Alexander Mils on Unsplash

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Shirley Lyle August 13, 2012 - 5:10 PM

I want to thank you very much for your informative piece. You have given me tools that propels me to do further search in depth to have better understanding of the process and terminologies.

Olufisayo August 13, 2012 - 5:17 PM

Hi Shirley! Thanks for the comment. We are glad we could help. Spread the news!

Emeka April 7, 2013 - 4:07 AM

I am very glad that knowledge and principles of lending came to be a case study on net.

Sources of Business Financing for Entrepreneurs November 20, 2014 - 7:05 AM

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Emanuel Babajide March 28, 2016 - 8:00 AM

Hello sir, can we source for funds in a consultancy firm? We closed down last year after the economic meltdown but one of our clients promised to give us a consultacy job but it has not materialised and we are still waiting. The problem is that we have relocated from Ondo state to Ogun state and we have to start again to reestablish the firm. We need fund for a new office, new equipment, salaries for new staff and running cost. How can we source for such funds?
Arc. E. S. Babajide MNIA

Olufisayo March 28, 2016 - 8:32 AM

You can try micro loans. Talk to RenMoney, Paylater.ng, Micro Finance Banks etc

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