Building Credit

IMF Loans, also known as International Monetary Fund Loan, has answered the prayers of many nations, and it continues to do so. What exactly makes the loan important? Read on to find out more.

About the IMF

The International Monetary Fund, established in 1944 after World War II, is an intergovernmental organization that performs the role of fostering the stability of the international monetary system. It also facilitates international trade, promoting sustainable growth, and reducing global poverty. 

The IMF comprises 189 countries.

Over the years, the IMF has experienced rapid growth, and now, it offers loans to member nations to help them fight crises and payment problems. 

But just like everything else in this world we occupy, the International Monetary Fund Loan (IMF Loan) has its critics, supporters, and even economists have a thing to say about it. 

What experts are saying about the IMF? 

Supporters of the IMF say they love the concept behind IMF because it offers help when a crisis arises in member nations and help to heal or reform backward economies. However, critics have said the IMF Loan is complete rubbish as it replaces national autonomy and aggravates economic problems. Economists say the loan creates a moral hazard on national scales, which we would get to in the disadvantages down below. 

What loans do they give?

The IMF, unlike other development banks, does not lend money for specific projects. Its loans are to help countries tackle their shortage of foreign exchange problems and stabilize their economies. 

IMF gives two types of loans to its member countries – non-concessional loans and concessional loans. 

The concessional loans attract very low and, in some cases, zero interest rates; they are for low-income countries. The non-concessional loans attract market-based interest rates.

There are several mechanisms used for IMF Loans. However, the two commonly used are the Extended Fund Facility and Standby Arrangements. For the Standby Arrangements, they only allow member countries to borrow money over one or two years, and repayments made between three to five years. For the former, the Extended Fund Facility, countries can borrow for three to four years and make repayments in about five to ten years. 

What are the conditions for getting a loan?

Before the IMF can grant its loan, the interested government has to agree to adjust its economic policies to solve the problem that caused it to seek financial help. 

They also serve as safeguards to ensure the country pay back the IMF loans. Conditions vary, mostly dependent on the economic policies of the lending country. Some common terms include:

1. Elimination of price controls

2. Budget consistency with the fiscal framework

3. A minimum level of federal government primary balance

4. A ceiling on government borrowing

5. A minimum level of international reserves

6. Minimum domestic revenue collection

7. A minimum level of social assistance spending such as subsidies

8. Improve financial sector operations

9. Build up social safety nets

10. Strengthen public financial management

How do countries get loans from IMF?

Countries that are member states of the IMF can access IMF loans for its balance of payment needs upon request. On request, the IMF will discuss with the country’s government to access the financial situation and needs. 

The country seeking the loan and the IMF have to agree on economic policies before the IMF approves the lending. Depending on the policy conditionality of the IMF, the country will have to meet some pre-conditions, send a letter of intent, and a detailed Memorandum of Understanding to The Fund’s Executive Board.

Once an understanding has been reached on policies and financing the package, the Fund’s Executive Board grants the country access to IMF resources.

Merits of the IMF

 1. Fills Deficit Gaps: An IMF loan is often beneficial to countries with a balance of payments deficit, to fill in the gap. 

 2. Offers Loans to its Member Nations: Perhaps its most beloved function is the loan’s ability to bail out member nations at crucial times. The IMF may decide to attach conditions such as specific economic policies that governments have no choice but to follow to access its loans. 

 3. Technical Assistance and Support: The loan providers counsel and advise countries trying out a new economic policy. 

4. Global Financial Stability and International Monetary Co-Operation: The loans help maintain financial balance in the global market.

5. Economic Growth: It does not only rescue the economies of countries and dills deficit gaps, but it also helps to stimulate economic growth.

What are the shortcomings of IMF Loans?

The IMF loans have undeniably been helpful to many, but it does still suffer criticism because it:

 1. Creates Moral Hazard: Many nations make the mistake of drawing up unsustainable budgets because they believe they would be able to get an IMF loan. Skeptics say it is no different from the moral hazard created by government bailouts of major banks.

 2. Barely any Intervention or Too Much of it: IMF sometimes does too much or too little time, and most people dislike it for that. Critics accuse the IMF of only help free-market countries. Free-market supporters blame the IMF and say it is too much of an interventionist.

3. Rich Countries Control The Organization: The rich countries decide in the IMF. They determine which country can borrow and the conditions attached to the loans. Developing countries are merely onlookers in the scheme.

4. Unfavorable IMF Conditionalities: Countries can only access IMF loans if they agree to meet IMF conditions. These conditions increase poverty in borrowing countries and are damaging to the masses, such as the removal of subsidy.

5. Unlevel Playing Field: One of the conditions for IMF loans is for countries to remove trade barriers and quotas, which gives room for foreign goods and services. Local businesses cannot cope with international companies in a free market economy.

Conclusion

The IMF, tasked with promoting sustainable growth and reducing global poverty, has generated mixed results, recording both successes and failures. The IMF loan has succeeded in some countries (the Asian financial crisis of 1997-1998) and failed in others (mostly the low-income countries).

Critics point out to its unfavorable conditionalities, such as fiscal austerity, privatization, trade liberation, open capital markets, and high-interest rates, which have failed massively in developing countries.

The IMF, in recent years, has reformed their loan conditionalities and developed several loan initiatives targeted at supporting low-income countries.

Meaning and Types of Loans

Every single day there is the need to carry out business transactions. It is a fundamental element of everyday living. Having the means to complete these financial activities usually means having sufficient funds. That is, however, a different matter.

Half the time, a lot of the things you need to do cannot be done because of a lack of finances at the time.

What happens then? You get a loan then. The technicalities on loans seem to be straight forward.

In this article, we will be breaking it all down; what loans are, what types of loans there are in Nigeria, and how you can get them. 

What is a loan? 

A loan is simply money (in some cases, it could include other financial assets) given to another individual with a promise of repayment either on principal (the actual amount borrowed/lent) alone or with interest (an additional amount added to the principal usually calculated throughout the loan). They could be for personal use or business. 

What are the types of loans?

There are various types of loans in Nigeria meant for multiple purposes. As there are many reasons to carry out transactions, there are many types of loans to meet these reasons as well. The types of loans are;

• Secured loan: a secured loan is a loan that requires you to provide collateral when applying for the loan. This collateral is a form of safeguard for the loan provider, and so if you don’t pay the loan back, the loan provider gets to collect the collateral to settle the loan. Secured loans usually have lower interest rates, and you can borrow more. 

• Unsecured loan: with unsecured loans, it requires no collateral in the application of the loan. Unsecured loans are usually personal, instant loans in Nigeria and come with higher interest rates because of the payback. There is less money available to borrow with unsecured loans, however. 

• Single payment loans: as the name implies, these loans involve a borrower taking out a loan from a loan provider and agreeing to pay back the full amount of the loan plus interest in one payment.  

• Monthly payment loans: unlike single payment loans where you pay back the loan once, you repay monthly payment loans over a spread period. Each month, you pay a prefixed amount, until the loan and interest are settled.

• Salary advance loans: Salary Advance loans involve people who collect their paycheck ahead of time. Most paychecks are paid towards the end of the month, but with a salary advance, you could get it earlier than that. The amount is then deducted from the actual salary when it is paid. Salary advance loans usually don’t charge high-interest rates.

• Mortgage: these are loans taken out for the purchase of a house or landed property. At a fixed period, an amount is deducted to settle the mortgage. However, if the payments on the mortgage stop or if it isn’t paid, the mortgage loan provider gets to collect the property from the borrower. 

• Fixed-rate loans: fixed-rate loans are loans with one fixed interest rate throughout the loan. 

• Variable-rate loans: with variable rate loans, the interest rates on the loan change over time.  The change is determined by the general interest rates fluctuating. 

How can you access the loans?

Loans are easily accessible from most financial institutions; it all just depends on what type of loan you’re looking for; either it’s for personal use or business. Banks, credit unions, cash advances are valid means of getting loans, and there is a plethora of other loan service providers popping up each day, each with its terms and conditions. 

Conclusion

Now that we have broken down the types of loans, you know which would meet your needs perfectly. Be sure to check out the interest rates on loans before you collect them, as well as the payback period. 

This article provides information about how you can apply for Bank of Industry Loans in Nigeria, as well as what it requires to do so. 

What is a Bank of Industry Loan?

The Bank of Industry is tasked with providing financial assistance for small to medium scale businesses in Nigeria through the use of loans. Therefore a BOI Loan is precisely for this purpose. 

Who is eligible for a Bank of Industry Loan?

Anyone with legitimate business can apply for a Bank of Industry Loan. However, more priority is given to businesses engaged in manufacturing and processing. The loan is targeted at sectors such as processing of agricultural materials, information technology, oil and gas, the creative industry and mining of solid minerals. It is important to note that BOI loans are only disbursed to business entities and not individuals. 

Also, BOI loans are only meant for the purchase of industrial equipment. They can not be used to buy assets like land or building. 

How much is available to collect?

BOI loans start from an amount of N5 million. However, the Bank of Industry can provide smaller loans in Nigeria through its matching funds platform, which it operates through Microfinance banks. 

How much interest is charged on BOI loans

The Interest rates for BOI Term Loans is at a maximum of 10% per annum, while that of loans for working capital is at 12-15% per annum. 

Do Bank of Industry loans require collateral?

The Bank of Industry needs businesses applying for loans to be held accountable, and so it mandates some assets of the businesses be pledged to secure the loan. Other security options such as bank guarantees, mortgage on landed property, debentures and external guarantors (in the case of loans worth less than N10 million. Third-party collateral is also suitable. 

What are the requirements for a Bank of Industry Loan?

Any business applying for a bank of Industry Loan must possess the following;

(For Micro-credit Loans)

•  Application Letter

• Certificate of Registration (photocopy)

• Copy of Cooperative’s constitution and Bye-laws

• Business Plan

• Business owner’s passport photographs (4 copies)

• Current Tax Clearance Certificate

• Copy of means of Identification

• Business’ bank Statement for one year

• Record of sales for six months and operating expenses.

• Evidence of Collateral

(For Small and Medium-scale Enterprise/Large scale Entrepreneur)

• Formal Letter of Application

• Copies of Certificate of Incorporation, Certified True Copy of Memorandum and Articles of Association.

• Photocopies of the Certified True Copy of Forms C02 and C07.

• Business Plan.

• Statutory Certificate of Occupancy or Deed of Assignment

• Photocopy of Title Documents  to the Collateral

• Approved Building Plan

• The estimate of Cost to be incurred on Factory Building.

• Valuation Reports on Factory Building(s) (for existing projects) and property offered as Collateral Security.

• Plant and machinery quotations

• The Audited Accounts of the business in the last three years

• Tax Clearance Certificate for the Company and two Directors for the previous three years.

• Passport photographs of each of the two Directors and the Company Secretary (4 copies) 

• Evidence of Appointment

How do you apply for a Bank of Industry Loan? 

You can apply for BOI Loans in two ways. For Physical application, business owners are to visit any of the BOI branch offices situated in 24 states in 6 geopolitical zones in the country or the headquarters in Lagos.

Applications for BOI loans can also be made online, through the Bank of Industry Website or through the application link www.boi.ng/apply. 

How long does it take for your application to get approved

Processing of BOI loans can take 30 to 40 working days to obtain approval. Afterwards, it takes 15 days for the credit to be disbursed.

Conclusion

If you’re looking for a means to expand and grow your business, the Bank of Industry provides the perfect loans suitable for such capital intensive financing. 

Peer to Peer lending in Nigeria

When we think about lending, most times our minds drift to the options financial institutions offer. However, peer to peer (P2P) lending is something that most of us have engaged in at some point in our lives. We call it the “borrow scheme” or “can I see” scheme. You know, “can I see N500,  I’ll give you back by tomorrow…”  

P2P lending is the same concept, however, to define it we can say that: Peer-to-peer (P2P) lending is a form of microlending that enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman

Types of P2P lending

Peer funded for Individuals

This type of P2P loans is usually funded by regular individuals and peers. These individuals invest in credit financing and earn returns based on interest charged on the loans.

Group Peer funded

Slightly different from individual funded credit. They are funded by a group of people, usually high net worth individuals through hedge funds, bank endowment funds, etc. Large investors fund this type of personal loans through peer-to-peer lending platforms. 

The major difference between the two types is the amount of money involved. Group peer funded loans deal with higher amounts of money than individual funded. 

How P2P lending works in Nigeria

Though the concept of p2p is familiar, the organizations pioneering its progress in Nigeria are fairly new. FINT, Farmcrowdy, and Kia Kia are at the forefront of driving this lending system. These organizations partner with individuals who act as investors on the back end while packaging these loans for the recipients who are in need.

These organizations do the hard work of running credit history as well as setting up certain criteria to make sure that these back-end investors are protected. 

Peer to peer lenders typically processes loans in two ways:

Firstly, your application is updated usually for days allowing potential investors to review your application. 

Investors then fund your loan, based on your application, by offering a portion of the total amount requested. If your request reaches 100 percent funding or at the expiration of the listing time, you may accept or decline the loan. 

Secondly, P2P lenders fund your loan is by approving your application and getting the required funds from a stock of blind investors. In this type of funding,  investors don’t review your application individually and you do not have to wait for your loan to be funded. 

What are the requirements for P2P lending in Nigeria

Criteria will differ based on the specific organization, however, listed below are some general requirements: 

• The borrower must be a salary earner
• must have a national means of identification, 
• bank account statement for the last 6 months (salary account), 
• employment offer letter, 
• a recent utility bill (not older than the last 3 months). 

Benefits of P2P lending

Benefits of p2p lending are, but not limited to:

• Access to interest lower rates
• Quick turn around time on application decision
• Transactions are very transparent, including any fees imposed by the p2p platform
• Can be more flexible than traditional loans

Conclusion

Next time you need an instant loan, think of p2p lending as an option, based on some benefits discussed, it could be a viable option to meet your needs. 

Credit report

Doing all the right things like making loan repayments on time doesn’t guarantee a top credit score. When you apply for an online loan, and lenders come back with a higher interest rate or tell you to ask again later – how does that feel?

Please be aware, and it’s not only late or missed payments that diminish your credit score or make lenders cautious of you. If you’re applying for a personal loan, there are other things on your credit report that lenders examine.

However, it isn’t just new applicants who are examined. Periodically, lenders review their current customers’ to assess the risk level of the borrower to the business at a given time.

Here are the top four credit items that make lenders wary—and how to avoid them.

1. Too many loan applications in a given time

There is no problem with opening a new loan account with your bank or taking out a revolving credit facility. But applying for loans in three to four online loan apps or banks in a short space of time in the bid to stay out of debt could be a sign of desperation. Also, opening two or three new credit facilities could tell lenders you’re in a bit of financial trouble. 

At the very least, you’ll be attracting attention the next time you ask your bank for something.

2. Being a guarantor

When you co-sign a loan as a guarantor or in any other capacity, the entire debt reflects on your credit report. As far as lenders are concerned, you’re the owner of the debt until it is fully settled. It will be included in your debts when applying for any form of credit.

So before co-signing a loan for a friend or family member, tell them the implication of making such commitments to a loan obligation that is not yours. If you are taking out a loan soon, then you should avoid co-signing another person’s loan as a guarantor.

3. History of partial repayments

While making partial repayments is good to avoid loan defaults, it affects your credit report negatively. Lenders who see your habitual nature of making partial payments monthly will be reluctant to grant you credit.

Occasionally making partial repayments doesn’t signal a problem. For example, you are making partial payments in January, after the holidays. But consistently paying partially every month shows you can’t pay off the balance. 

4. Lots of hard credit enquiries. 

For every time you apply for a loan, the lender will request a credit report on you. The impact of credit report inquiries varies by the borrower, credit score and the number of confirmed inquiries. Many people don’t realise that too many enquiries on your credit report can negatively affect your credit reports. Enquiries can be made on your credit report even when you are requesting a “buy now, pay later” on a cellphone. So be sure they’re only done when absolutely necessary. 

Conclusion

It is crucial to note that there are big red flags of credit reports, like bankruptcy, foreclosure and late or missed payments. But those are not the only financial mishaps that make banks wary of a potential consumer. 

Loan refinancing means taking out a new loan to clear one or more outstanding loans. Borrowers usually refinance their loans to receive low interest rates or to reduce their repayments ultimately. Taking out personal loans to merge your debt can affect your finances positively and help you stay debt-free. 

However, once you’ve been granted a personal loan and your monthly repayments are on time, you may consider refinancing the loan.

It is a smart move if your credit score has improved significantly to a stage where you’ll be offered a rate reduction to compensate for commitments and cost of taking the loan.

When is the best time to refinance your loan?

• Better credit score: One way to be eligible for a lower interest rate on your personal loan is to boost your credit score. If your score has seen an improvement since you took out your loan, it could be a plausible reason to refinance.
• You want to change the existing rate type: Having a variable interest rate on a personal loan makes it difficult to plan for monthly repayments. By opting to refinance your loan, you can switch from a variable to a fixed rate. It enables you to enjoy consistent monthly payments.

How to refinance a personal loan

1. How much money do you need?

In refinancing a loan, you’re primarily clearing out the existing loan with a fresh one that has different repayment conditions. Find out the exact amount of money you need to pay off your existing loan. You can also ask if any prepayment fees might exceed the benefits of refinancing.

2. Check your credit score and report. 

Before considering refinancing your loan, you must confirm if you are eligible for a lower rate than what you’re paying currently. If the new interest rate isn’t notably lower, it may not be worth it. Alternatively, check your credit score to know if there is a difference.

3. Do your research

Research is crucial when you are considering refinancing personal loans. It’s worth it to see what different lenders offer and their requirements. You might also need to consider the time factor, a new loan with a lower interest rate isn’t always better if you’re making repayments for a longer time.

4. Compare refinance rates

Always compare refinancing rates and pay attention to every rate presented. Draw a table to compare key features and interest rates. Then, based on your research and your discussions with the lender, decide what’s best for you.

Advantages of refinancing a personal loan

• Better interest rate: Not only could a jump in credit score help you get a better interest rate on a new loan in Nigeria, but you might also enjoy lower rates in your transactions generally.
• Faster repayment of loans: When you’re convenient with higher monthly payments, and you want to pay your debt faster, you can refinance a personal loan to get a shorter term. It reduces the cost of interest payments on the loan.
• Extend your repayment period: If you are having difficulty in making timely payments, extending your loan repayment can help you manage your monthly repayments better. 

Disadvantages of refinancing a personal loan

• Payment of extra fees: Whenever you are granted a new loan, you might have to bear additional lender cost, which can cut into the benefits of refinancing. Be sure you understand the terms and conditions of your personal loan refinance to help you make the best financial decision.

Conclusion

Taking a refinancing option on your personal loan might be a good idea. However, you need to be careful and with clarity when choosing to refinance other sensitive loan options like a mortgage. 

It might be impossible to know if a lender will not be able to meet contractual obligations due on loan even after a rigorous and lengthy assessment. However, managing credit risk can reduce the severity of a potential loss. The reward for the lenders taking on these risks is gained from the interest charged on the loan

What Is Credit Risk

It is a possible loss resulting from a borrower’s inability to make payments of a loan or meet his/her contractual obligations. Simply put, it is a risk that a lender faces on the possibility of not receiving the owed principal and interest. The risk results in an interruption of cash flows and higher costs of collection. 

Types Of Credit Risk

There are typically three types, and they are:

1. Default risk arising when the borrower is not able to pay the principal loan amount due
2. The risk resulting from the reduction in the risk rating of an issuer
3. Credit spread risk occurring due to inconsistency in the variance between interest rates in investments and the risk-free return rate.

Credit Risk Management

After the economic meltdown in 2008, many companies realized that there is no such thing as a “big company” if you do not make enough provision for risk assessment. Even if your business is safe, you might be connected to some risky businesses in which their downfall could ultimately lead to yours.

As a result, businesses have to adhere to strict legislation as well as heightened requirements for accountability and risk management. In the last decade, credit risk has grown to become a strategic sustainability measure.

The Benefits of Credit Risk Management

The significant advantage of credit risk management is to mitigate risks arising from credit transactions which will ultimately reduce risk. They can also include the following.

1. It allows you to identify potential clients that may come at too high a risk and above your risk tolerance
2. It can be leveraged as a strategic opportunity
3. It is also able to improve the overall performance of the business substantially as well as give the business a competitive advantage

How To Mitigate Credit Risk

There are several ways you can use to reduce your risk to the barest minimum. Some of them are mentioned below and they are: 

1. Check the credit records of a potential customer thoroughly. Starting with credit scores which can give you an indication of the kind of risk your potential customer is carrying.
2. Build a long term customer relationship with the client
3. Your agreement with your customer must be in clear terms. Be sure to draft your lending terms and condition 
4. Establish a credit limit for a potential customer
5. Having a standard policy as to dealing with overdue payments can also go a long way. 
6. You can opt for the credit insurance to your advantage. Here, the insurance company becomes liable to pay the debt if the borrower defaults.

Conclusion

Credit risk is also closely related to an investment’s return, the most common example being that the yields on bonds strongly correlates to their intended credit risk. The higher the risk, the higher the interest rates demanded by investors for lending their capital. As loan companies in Nigeria get very discouraged with customers having low credit scores.

A credit score is an evaluation used by financial institutions to describe a loanee or consumer’s (Individual or Corporation) creditworthiness. A higher credit score depicts a reliable and credible borrower. A credit score is determined by the credit history of the borrower, which entails several open accounts, repayment history and total level of debt. Credit scores are used by lenders to determine the probability that a borrower will repay their loans.

How does Credit Score work? 

The credit score play’s a key role in a lender’s decision to give loans. A borrower with a lower credit score infers that a financial institution bears more risk loaning such borrower. A high credit score is considered good as it makes the interest rates of loans reduce; and also makes the application process for a letter of guarantee easy. Therefore, a high credit score may result in a loanee receiving lower interest rates on a loan. 

Sometimes credit scores are also used to determine the size of an initial deposit required to get several kinds of loans. Lenders also used credit scores in deciding the interest rate or credit limit on a credit card.

In Nigeria, the credit scores of financial institutions will vary depending on the institution. 

Factors that affect Credit Scores

We’ll look at 5 factors to consider when calculating a credit score, they are:

1. Payment History: This amounts to about 35% of how a credit score is evaluated. It shows whether a person pays their obligations on time such as bills. It is used to determine the possibility of a borrower whether they will be late in repaying their loans based on how promptly they settle bills.

2. The total amount owed: This is the second most influential factor of the credit score. It amounts to 30% of the credit score. It refers to the percentage of available credit that has been borrowed by the loanee. It is used to determine who can handle debt responsibly. 

3. Credit History: The credit history is used to examine the length of the time an account has been opened and the most recent action on an account. Accounts with a long credit history stand will score higher credit scores than accounts with minimal or no credit history at all. Those without a long credit history can still score higher on their credit scores if there are no missed payments and outstanding debts. 

4. New credit: New credit refers to the number of credit accounts a borrower has. Lenders often carry out a credit report on borrowers. A borrower who as opened credit accounts and applied for too many loans will score lower on the credit score. 

5. Types of credit: Types of credit also known as the credit mix is used to examine borrowers with a good mix of account types involving credit and instalment loans. A borrower with an existing credit account demonstrates experience in managing credit and may likely score higher credit score.

How to Improve your Credit Score

Make payments on time

Endeavour to make your payments on time, and if you have down payments to make.

Review of Credit Reports

Reviewing your credit reports helps to know what is benefiting you. You can request your credit report from your financial institution, then you can run a personal assessment to see what may help or potentially hurt your score.

Use Credit Monitoring to Track Progress 

Using credit monitoring services is a simple way to monitor credit score changes over time. These services monitor changes in your credit report, such as a paid-off the account or a new account opened.  Credit monitoring also helps to prevent identity fraud.

Limit Request for Credit Inquiries

The number of requests you make for new credit should be minimal. Too many requests for credit is known as hard inquiries. For example, if in the past you’ve requested for a new credit card loan, car loan, mortgage loan or some other form of a loan, it can negatively affect your score. A lender could interpret the borrower is facing financial difficulties and therefore be a bigger risk to the lender.

Pay off Debts and maintain a low balance on Credit Cards.

Borrowers with high credit scores often have very low credit utilization ratios. A low credit utilization ratio illustrates that you aren’t in debt and haven’t maxed out your credit cards. It shows that the borrower is likely to know how to manage credit well as lenders can be wary of loanees with low credit scores.

Diversify accounts

You may consider opening new accounts to add to your credit mix.

Conclusion

A good credit score makes a lender consider you highly for a loan in Nigeria. It also helps you get the best interest rates when you intend to loan. Since you never can tell well you might be needing a loan, it is wise to ensure that you’re as good as possible by regularly checking your credit report, having a positive payment history, having low balances on your credit cards and minimal inquiries for credit. 

A letter of guarantee is an agreement issued by a bank on behalf of a customer or company who proposes to acquire goods from a supplier. Don’t confuse this with Letter of Credit, though.

The letter assures the supplier of payment on behalf of the customer, even when the customer of the bank defaults.

It is applied for by a customer. After the bank evaluates the risk and they are comfortable, they will back the customer with a letter of guarantee.

Basics of a letter of guarantee

These letters are used when a party in a transaction is uncertain that the other party involved can meet a financial obligation. They are usually used in purchases of expensive equipment or other property.

They are used in a wide variety of business situations such as declarations during export and import processes, and sometimes in contracting and construction. The bank negotiates how much they will cover with their customer.

When is a letter of guarantee required?

• New Supplier

Suppliers change contracts often with several customers. Therefore, customers are likely to provide a supplier with a letter of guarantee since a new supplier won’t have a history of transactions with the new customer. The uncertainty that exists between the two parties will require a letter of guarantee. 

• Trade outside usual Trading Area

For businesses that take place overseas, you may need a letter of guarantee to show commitment to pay for products. This often happens among import and export businesses, suppliers of goods outside a country may require assurance from a bank that they will receive the fees should clients cannot pay.

• Startup Company

Some start-up companies may not have the funds to finance the purchase of goods at the start. They may require a letter of guarantee when purchasing goods.

The Process for a Letter of Guarantee

The following process is followed:

1. Examining and Issuing a letter of guarantee

When an application for a letter of guarantee is filed, a bank determines whether the customer qualifies for the transaction. This is done by reviewing the underlying deal, the customer’s credit score and other relevant material. Additional information or documentation from the customer may be required.

2. Fees.

The fees for the transaction are determined by using the principles and rates as stated by the regulations of the bank.

3. Amendment of letter

The letter may be amended by the involved parties to include the adequate requirements of parties. The subject of Amendments consists of the underlying asset, validity period and so on.

4. Compensation against a letter of guarantee

When a supplier has supplied goods or rendered services to the customer and make claims for compensation from the assuring bank, the bank notifies the customer of the request. The bank then examines the claim and certifies that they meet the required claim clauses of the letter. If they are met, payment is made to the supplier for the stipulated amount agreed.

5. Post-Guarantee Management

The bank updates its customer’s record to reflect changes when the bank has made payment to the supplier. The details of the letter are stored ad verified to ensure that it reflects the actual transactions.

Conclusion

A letter of guarantee is used when parties (buyers and sellers) or business, and customers do not want to make a trade credit agreement. A letter of guarantee is a promissory letter that protects and prevents the financial risk of a supplier or producer. 

In finance, the creditworthiness of a lender determines how worthy a lender is of a loan in Nigeria. A person’s creditworthiness is what creditors or lending institutions look at before they approve a loan or credit.

Several factors determine the creditworthiness of a person, such as payment history and credit score. The Five Cs of credit are the five methods of evaluating a borrower for a loan. It also considers information about the loan. Let’s look at the five Cs below:

Character

Character refers to the credit history of a borrower. This is a track record of the borrower for repaying debts since history is the best predictor of the future. Lending institutions demand a certain amount of management or ownership experience. A lender will review the personal credit of borrowers and their guarantors before a loan is granted.

Data gathered from these reports help lenders evaluate a borrower’s credit risk.

Most lending institutions require a minimum credit score before they approve a loan. This will vary depending on the financial institution. The higher the credit score of a lender, the higher the likelihood of being approved. The credit score of a borrower is also used to determine the rates and terms of loans.

Conditions

The interest rate and amount of principal affect the conditions of a loan, it influences the desire to approve a loan. Conditions may also include how a borrower intends to use the credit. Other conditions, such as the state of the economy or legislative changes, also affect the terms of the loan.

Capacity

The potential of a borrower to repay a loan is what capacity measures. This would entail the cash flow of a borrower. A borrower should have sufficient cash flow to get a higher credit score. Lenders may inquire about the time a borrower has been employed or the number of years in business to ensure stability.

Capital

Lenders consider the capital a borrower puts forward towards any investment. For example, if you were to purchase a car and you have put up a down payment of over 50% of the cost of the vehicle needing only about 50% to 30% loan, lenders are more likely to score such borrower higher on the credit score. This shows that the chances of default by the borrower are low. A substantial down payment can also affect the rates and terms of an applicant’s loan.

Collateral

Collaterals help loan applicants secure loans. They are used as leverages in case a borrower defaults on a loan. Loans that are secured by some form of security are usually offered with lower interest rates and contain better terms than other unsecured types of loans. The lender capitalises on the assurance that if a borrower defaults, the lender can recoup their loss by repossessing the collateral.

Conclusion

Understanding the fives Cs of credit is crucial to your approval of a loan. It helps a borrower prepare their credit score ahead of a loan application. Default in one area can affect your credit score from a lender.

Financial organizations attempt to reduce the risk of lending to borrowers by performing credit analysis on individuals and businesses applying for credit or loan. So, with the Five Cs, you should work on improving your credit score, and endeavour to save up for larger down payments to give you higher chances for a loan.