Bank loans in Nigeria: types of collateral and loan documentation – finance and banking
Bank loans are a very valuable tool for the growth and sustainability of businesses in Nigeria; especially since we are not exactly a credit company. It is important to understand that obtaining a bank loan in Nigeria does not necessarily mean that a person or business is in financial difficulty. In fact, a loan can be a powerful tool in raising capital and building a business, when used correctly.
From short term loans with low interest rates to long term loans with higher interest rates, there are a wide variety of loan options with different specifics available and a properly obtained loan can be a nifty tool. to catalyze the growth of a business.
Guarantees for bank loans
Before a bank gives a loan to a party, it will need some kind of protection / guarantee for the money it distributes; think of it as a safety net, a security that the bank can hang on to, acting as an assurance that in the event of non-repayment of the loan by the borrower, there is something to look for for settlement loan – it’s called a COLLATERAL.
Title to the collateral does not generally pass to the Bank when a loan is granted; instead, the collateral remains the property of the borrower. However, if the borrower does not repay the loan as agreed by the parties, the Bank may be entitled to sell the collateral and use the proceeds to offset the debt.
Types of guarantees
With the development of the banking sector in Nigeria, there is a wide range of acceptable collateral for bank loans:
It can be an undeveloped lot, a partially constructed building or a finished structure. In any case, the Bank will usually send real estate experts and land surveyors to inspect the property and confirm that its value is sufficient to secure the amount to be lent.
This category covers tangible assets other than buildings; cars, appliances and other personal property of reasonable value; these are mainly used to secure small loans.
In the case of borrowers engaged in manufacturing, importing, exporting, trading and generally trading in goods on a large scale, they can use these goods as collateral for bank loans.
When a borrower uses high capacity equipment, machinery and facilities; especially manufacturers, service providers, and oil and gas workers, valuable equipment can be used as collateral for bank loans.
Investments such as stocks and stocks are acceptable securities for bank loans; a person who has valuable investments can use them to obtain bank loans. Previously, borrowers seeking to use shares as collateral had to deposit share certificates with the Bank. The CSCS transfers the affected shares to a privilege account reserved in favor of the Bank.
While it may seem counterproductive, there may be times when a borrower prefers to take out a loan, even if they have money in their accounts. This may be due to certain advantages he enjoys from having these funds in his accounts; Whatever the reason, cash is an acceptable form of collateral and in the event of default by the borrower, the bank can use the cash to offset the loan amount.
Loan documentation refers to all the documents used by the parties (the Bank and the borrower) to specify the terms and nature of the loan operation, in particular with regard to the pledge and loan guarantees. It can be one or more of the following:
Letter of Offer:
This is a document from the bank that sets out the terms and conditions that will guide the loan transaction and, if the borrower finds the terms acceptable, he proceeds to the signing of the letter of offer and it works as a binding contract between the parties.
A letter of offer for a bank loan specifies the borrower’s contact details, the purpose of the loan, the duration of the loan, the type of guarantee advanced, the repayment terms and other necessary clauses.
Legal mortgage :
When the borrower uses real estate as collateral, he may be required to constitute a legal mortgage in favor of the Bank. This legal hypothec is then entered in the Land Register and the Bank’s interest in this property is duly registered. Ownership of the property does not immediately pass to the Bank. However, if the borrower does not repay the loan, the bank will have a multitude of remedies, including the sale of the property.
There could also be a Legal third-party mortgage when a third party, owner of the property, creates a mortgage in the name of the Bank in favor of the borrower. In this case, the borrower does not own the asset but the Bank can use the asset to offset the loan in the event of default.
This is a document signed by a person acting as surety for the borrower. By this document, the surety undertakes that in the event of non-repayment of the loan by the borrower, he (the surety) can be held personally responsible for the repayment either of the total amount of the loan, or, s ‘it is contained in the Personal Guarantee, for an amount such that the surety has agreed to be responsible.
One collateral option available to corporate borrowers is a debenture. The borrower creates a charge on its assets in favor of the lender. This means that the lender receives interest on certain assets from the borrower, and in the event of default, the lender can take out the asset and use the proceeds to pay off the loan.
There are 2 types of debentures – the fixed charge, which is created in respect of tangible and identifiable property such as land and machinery; and float charge, which is typically created with respect to non-constant assets like stocks and stocks (that is, their value can change over time). A Floating Charge can become fixed in the event of default by the borrower.
There could also be a debenture which combines the characteristics of the 2 types of debenture already discussed; this is called a fixed and floating debenture.
This is generally used by people who deal with large amounts of goods; importers, exporters, manufacturers and wholesale distributors. The borrower uses his assets (“stock”) as collateral for the secured loan and, in the event of default, the Bank may seize these assets.
Letter of lien / compensation:
This is used when a borrower intends to create an interest in favor of the bank in one of its assets. It can be a deposit in a bank account or in another property of the borrower; the borrower simply signs a letter indicating that he grants the Bank a lien on the specified property.
A borrower can also sign a document entitled “Authorization to exercise a right of pledge and set-off on the deposit with the Bank” when he uses the money in his account with the Bank as collateral for the loan. This gives the Bank the right to offset any amount owed by the borrower directly from the deposit to any account he holds with the Bank.
Permanent irrevocable direct debit order:
With this document, a borrower gives the Bank an “order” to periodically deduct an agreed amount from an account with the Bank and to pay it out on loan settlement. With this standing order, the Bank has the power of the borrower to debit the client’s account at authorized intervals (usually monthly) until the full loan amount is settled.
With this document, the borrower, usually a business, agrees that as long as the loan facility remains, they will not use the same collateral that was used to secure the loan in question to secure a facility of a other lender. Basically, this protects the lender’s interest in the collateral.
Used to secure the collateral actions, a joint memorandum is signed by the Bank and the borrower, the actions to be used as collateral listed and then sent to the central securities clearing system for further action. In addition, the CSCS transfers the shares to a privileged account reserved in favor of the lender and the shares cannot be transferred without the written authorization of the borrower.
This is generally used for goods. With this, title to the property vests in the Bank and even though the property is in the physical possession of the borrower, it is deemed to be held in trust for the Bank by the borrower. When the loan is repaid, the ownership of the goods reverts to the borrower.
These are most of the documents that one can come across in the process of obtaining a loan facility from a bank. While this article has summarized the basic meanings and implications of these loan guarantee documents, it is important for a person seeking a loan from a bank to have a lawyer review the documents to ensure that ‘there are no draconian terms and provisions that could harm the borrower.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.