Nigeria is generally not a lending-supportive business community, for this reason, bank loans are an extremely valuable tool for the expansion and sustainability of businesses in Nigeria. It is critical to realize that obtaining a bank loan in Nigeria does not automatically imply that a person or company is experiencing financial difficulties.
When used properly, a loan can have the potential to be a potent tool for raising capital and expanding a business. A properly obtained loan can be a handy weapon to catalyse the growth of a business. Loan options range from short-term loans with low-interest rates to long-term loans with higher interest rates, each with its peculiarities.
This article examines the various assets that can be charged on a secured credit transaction.
Various securities and collateral for Bank Loans in Nigeria
1. Landed Properties
In Nigeria, the most well-known and frequently used type of collateral for loans is real estate. Real estate accepted as collateral for bank loans includes landed properties, constructed buildings, leaseholds, and fixtures on a property.
Any title documents, including the Certificate of Occupancy, the Deed of Conveyance, the Deed of Assignment, the Deed of Gift, the Deed of Sub-Lease, and any others, must be deposited with the bank by the borrower. A charge, a legal or equitable mortgage, or both can be used to create security.
As security for the repayment of a loan, a legal mortgage involves the transfer of the property’s legal title to the bank. The transfer is contingent upon the reversion of title to the applicant upon repayment of the loan.
Shares of a Nigerian corporation can be used as security for a loan transaction. To perfect an equitable mortgage or charge over shares, the borrower, with or without a memorandum of deposit, must deposit the share certificate with the lender.
The individual shares of the shareholders or the unissued shares of the corporation can be charged. Nonetheless, under the Companies and Allied Matters Act (CAMA) 2020, companies in Nigeria no longer keep unissued shares, hence, only shares belonging to shareholders can be charged or, at the very least, shares that would be allocated to the lender in the future.
For the mortgage or charge to be legally perfected, the lender must have an agreement to return the shares to the borrower if the loan is paid off.
3. Cash security
Although this is the most straightforward type of security for bank loans, this type of security is uncommon in Nigeria. Cash security can take the form of cash deposits, fixed deposits, Treasury bills, current accounts, or savings accounts.
This merely means that a person can obtain a loan from a bank where an active account is kept and that if the borrower fails to repay the loan as agreed, the bank may liquidate the account to recoup the disbursed loan. The interest charged on the loan typically varies from one bank to another. The security in a cash security structure is provided in the form of a charge against the funds.
4. Lien on the Asset
This is also known as a joint registration of assets like machinery, equipment, and vehicles under the name of the bank and the customer. Until the loan is fully repaid, a lien is put on assets that were co-financed by the bank and its client.
When the borrower defaults in paying the debt, the bank can sell its part of the asset to acquire the principal and the interest on the debt.
5. Domiciled Payments
It is uncommon in Nigeria to use this type of loan security. It is a type of security in which bank clients who had contracts with well-known or multinational companies use their local purchase orders or contract agreements to secure a loan.
It is secured on the understanding that the known principal or multinational company is prepared to pay upon successful completion of the contracted task.
6. Machinery and Equipment
Machinery and equipment can be pledged, charged, or mortgaged as security for a loan. It is created by transferring ownership of the asset with the caveat that it will either be sold or returned to the borrower if the loan is not repaid on time.
Receivables such as insurance policy proceeds, debts, charges, mortgages, assignments of receivables as security, and contractual rights are all examples of receivables over which security may be granted. This type of security may be provided through an assignment or charges.
8. Intellectual Property
Intellectual property rights, including patents, trademarks, copyrights, and industrial designs, may be pledged as security through a fixed charge, an assignment, a mortgage, or a floating charge.
A deed of agreement outlining the terms and circumstances under which the security is to be granted must be signed by the bank and the borrower. In Nigeria, it is not a widely used method of security.
9. Stock Hypothecation
Traders and wholesalers of consumer goods are the major users of this type of security for a bank loan.
A special agreement is made between the bank and the customer for this kind of security to have the financed goods warehoused and released in pieces, either in exchange for the cash value of the financed goods or the cash value of financed goods that have already been released to the customer’s bank account before more financed goods are released.
10. Documentary credit
To access the credit provided to the buyer, a seller of goods must deposit shipping documents, such as a bill of lading, with the bank. The buyer will request a letter of credit from their bank on behalf of the beneficiary, the seller, to start this type of lending.
The bill of lading will act as security for any loan that the bank grants to the buyer to fund the letter of credit. In this case, the bank might be listed as the consignee of the items on the bill of lading that was delivered to it.
The vital element of loans is securitizing to have them paid up. A non-securitized loan is a risky adventure that might see the company make huge losses in the end.
Frequently Asked Questions (FAQs)
When a loan cannot be paid, the bank takes possession of the security and adopt all means to acquire its loan.
The lender can petition for the winding up of the company in line with the provisions of CAMA.