Types of Collateral-free Loans in the Nigerian Banking System
Every borrower wants a collateral free loan. But the truth is, every commercial lender requires some sort of security for their funding. This security might be your bank account or your cash flow, but it is still a form of collateral. When lenders offer to provide collateral-free loans, they are referring to loans that do not require the borrower to source for any form of external collateral. Here are the types of loans you can get in Nigeria without needing to provide external collateral:
- Cashflow based loans
These are loans that are provided based on your cashflow. In this case, your cashflow acts as collateral. The lender calculates your monthly turnover and uses it to determine how much funding to offer your business. The qualifying factors for cashflow based loans differ, depending on the bank you want to apply to. But generally, most banks require that you have a business account with them that you have been running for at least 6 months. Yet another reason to open a business account
2. POS based loans
This is also a variety of cashflow based loans, but it is not necessarily based on past performance. If you have a new business in a physical location where you will be collecting payment in person from your customers, then you might be entitled to this loan. Here, the bank provides a loan on the basis that all payments made by customers, will be made through the bank’s POS machines which will be provided to you after the loan is disbursed. The collateral for this loan is the cashflow which is received via the POS into your account with the bank. The bank will monitor your POS usage and deduct its monthly repayments from your account.
3. Payday Loans
This is funding provided based on your monthly salary. If you are a business owner who also has paid employment, you can get access to funding from the bank on the basis of your monthly salary. This is similar to the cashflow based loans in that your monthly salary acts as the collateral and the bank would require a letter from your employer committing to make payments through your account with the bank and to notify the bank of any change in your employment status.
4. Asset financing
This is not technically a collateral free loan, but no loan really is. With asset financing, the bank lends you money to buy an asset for your business, like a machine or generator, without asking for collateral. However, the asset is usually bought in the bank’s name which means that it is is actually used as the collateral.
5. Invoice discounting
This is funding available to contractors and suppliers of big companies who are yet to get payment from the companies. The supplier or contractor takes the unpaid invoice to the bank and gets a loan based on it. The collateral in this case is the expected funding from the big company. Note that this does not apply to every company. You would need to ask your account officer for a list of the specific companies whose invoices your bank accepts as collateral.
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