The Risks and Burden of Bank Borrowing
Nigerian businessmen who obtain bank loans end up putting burden upon themselves. Much as a bank loan is desirable at certain critical moments in your business development cycle, there is need to count the cost before approaching your bankers for facilities.
Many customers who approach the bank for loans never take cognisance of the interest burden when drawing their repayment schedules. Despite the desire of the federal government to bring down lending rates, the cost of borrowing is still high in most banks. The cost of borrowing will usually include a gamut of charges. The following are examples of the charges that Nigerian banks slam on their borrowing customers: (i) Commitment fees (ii) non-drawing fees (iii) management fees (iv) advisory/consultancy fees (v) additional interest on excess over authorised limits (vi) drawings against uncleared effects (vii) facility restructuring and (viii) processing/renewal fees (ix) late repayment of loan facility and (x) processing fee for consent for share of security. People are apt to say, humorously, that bankers always have a way of recovering expenses incurred for or on behalf of every borrowing customer.
One of the risks of borrowing from Nigerian banks is the delay in the disbursement of loan proceeds. There are often tenuous administrative procedures that loan requests have to go through in banks. Many times, banks disburse loans to their customers at periods when the purpose of the loan is no longer feasible. The result is that a careless borrower, who takes such a loan at the wrong time, diverts the proceeds to unproductive ventures.
A borrower could put a burden upon himself when he accepts an amount lower than what is needed to execute a project. Often, for fear that a higher amount would not be approved, some borrowers who are not guided would apply for a lower amount. In almost all cases, such a loan would go bad because the loan purpose would not have been achieved.
Anyone who approaches a bank for a loan is exposed to secrecy risk. Like a medical doctor, the lending banker would want to know everything about your business as well as your personal financial lifestyle. A prudent banker would not lend to someone he does not know too well. So a borrower is exposed to the risk that his trade secret, which he hitherto guards jealously, could be exposed to third parties through the lending banker. However, it is instructive to note that bankers are guided by law and practice to keep their customer’s affairs secret except in certain circumstances.
Bankers, like most financial intermediaries, are very careful in wording loan agreements in such a way that the bank is always at a great advantage. Therefore, a prudent borrower should seek the guidance of a professional who understands the language of banking.
Offer letters to customers for credit facilities usually contain clauses to the effect that the bank is obliged to vary the contract without notice. For example, most bank offer letters would clearly state that the interest rate is subject to changes in the money market. In reality banks adjust their lending rates automatically, whenever there is a change in Central Bank’s minimum rediscount rates. In such a case, your forecast on interest payment could be thrown overboard while your borrowing cost could escalate.
Bankers are clever professionals who will do everything to transfer every risk to you or a third party. For example, bankers would expect you to insure your life and properties, including those that are not pledged as security. Insurance of all your assets constitutes additional overhead expenses on your business.
When a bank finances your foreign business, it protects itself by inserting a clause in the agreement or draws your attention to the Uniform Customs Rules governing international trade, which stipulates that the affected bank is dealing in documents and not in goods. So, you are on your own when goods that are of inferior quality are shipped to you by your trading partners.
Banks expect their borrowing customers to shoulder the business risks inherent in the project they are financing. The business risks are those relating to the probability of completing or elongating the asset conversion cycle on time. Assets conversion cycle traces the process of starting a project with cash and ending in cash. A business owner starts with cash and buys raw materials; the raw materials which are initially in stock are transferred to the production line to become work in progress. When the raw materials are thus processed, it is converted to finished goods stock. The goods are sold, some on credit, and some on cash basis. On due dates, the credit sales (now debtors) are converted to either bills receivable or cash from debtors. In real life, things do not work the way it is planned. When a banker grants you loan, he expects you to manage your cash conversion cycle in such a way that your cash flow pattern would not be impaired.
The banker is expected to take cognisance of your cash conversion cycle and cash flow forecast when determining the repayment of your loan. There are situations where, in an attempt to over-protect its own interest, a bank proposes a repayment programme which is not realistic or in consonance with your cash flow pattern.
Finally, each bank borrower faces the risk of not being able to provide counterpart fund, which may jeopardise completion of the project. In giving out collateral, a borrower may be jeopardising the future comfort of his family. If you pledge your family house to secure a bank loan, you could create problem for your family in the event that you are not able to meet the bank’s repayment programme. A lending banker can repossess or sell the mortgaged property which may render your family homeless.
Alaba Olusemore is the chief executive officer, Nesbet Consulting, a financial consultant and trainer based in Lagos. |
