How to Get Interest-free Loans for SME Business in Nigeria
Or looking for institutional debt financing that come with zero interest?
Then you are not alone.
Many small businesses in Nigeria today are tired of the shark loan deals that are available in the market.
A lot of the available loan instruments for come with high interest rates and require a quick turn around for repayments, which is not good enough for a small budding business.
I remember in May of 2020, I took a loan of 500k Naira from a particular bank, and I was required to start my repayment immediately from June 2020.
Just imagine that.
No moratorium, no breathing space, no bedding in period. I had to start paying 50k right from the next month.
Infact, the repayment I made was actually taken from the loan capital received.
At that time, the business had not made a single profit, in fact it was running at a loss after capital expenditures.
The loan collectors didn't even care about how the business was doing. All they wanted was their money plus the 50% interest on top of it.
I struggled to repay that loan and funny enough, I repaid that loan with the capital plus my personal money that I had to source from elsewhere.
That business was actually choked to death in a matter of months because the type of loan used was a bad loan.
Now, I'm not the only one experiencing these types of bad SME loans in Nigeria.
A lot of SME businesses out there are being exploited by loan sharks offering loans with high interest rates and no breathing space.
Here's a typical example of such:
It's depressing really, and that's why it's important for any SME business that wants to survive to only take low-to-zero interest loans that come with a moratorium period.
And that's why I had to do my own research to find some of the best zero interest loans for budding small businesses in Nigeria.
If you're interested in taking a loan that supports your SME business to grow, then you should read on.
Bank of Industry (BOI)
The BOI supports SME businesses in Nigeria with single digit low interest loans, and they come with a moratorium period.
The moratorium period ranges from 3 months to 1 year, depending on the loan structure.
This means that the SME business won't make any repayment for an average of 6 months after loan disbursement.
With this, the business can have a settling period to set up shop and start acquiring customers.
The BOI supports all kinds of businesses in different industries in Nigeria, such as:
- Agriculture
- Engineering / Technology
- Fashion / Textiles
- Manufacturing / Production
- Food / Agro Processing
- Livestock / Livestock Processing
- Renewable Energy
- Etc.
Budding SMEs can access up to 10 million Naira loan while established medium and large enterprises can access up to 200 million Naira loan.
BOI Loan Requirements
To access loans from the bank of industry, SMEs must meet some basic requirements such as:
- Identity Verification: government-issued identification documents, NIN, BVN, etc.
- Business Registration Proofs: Business must be registered with the CAC as a sole enterprise or limited liability company
- Trade Association: Business must be registered with at least one relevant trade association
- Lease agreement or deed of assignment of the property where business is located
- Feasibility study of project
- Regulatory approval if needed for project execution; e.g NAFDAC
- 12 months bank statement
- 3 years audited financial account from BOI recognized auditors
- Declaration of liabilities if any
How to Process BOI Loan
To process a BOI loan, the business owner or CEO must make a formal application to the BOI on the company letterhead, together with a duly completed loan application form. You can view the available industries and their approval checklists.
Here's a sample letterhead you can copy for the formal application:
The pre-approval process involves the following steps.
Personal Identification
The business will provide 8 passport photographs and Biometrics Verification Number (BVN) of the owner and each major shareholder of the company.
The business will also provide evidence of deed of assignment, payment of lease, or ground rent up to date.
Proof of Incorporation
The business will provide photocopy of certificate of incorporation, certified true copy of Memorandum and Articles of Association and Forms CAC 2.5 (Allotment of Shares), CAC 2.3 (Particulars of
Directors) and CAC 2.1 (Appointment of Company Secretary)
Business Plan
The business will provide a comprehensive business plan that includes the company information, Curriculum Vitae of key management staff, documentation of technology or manufacturing processes, and agreement with technical partners where applicable.
The financials of the business plan must also contain quotations or proforma invoices for the supply of equipment or machinery if any.
External Valuation
The business will provide a valuation report from one of BOI's accredited valuers to ascertain the company's assets, liabilities and risks.
Provision of Guarantors
The business will provide identification of 2 external guarantors that will be verified and accepted by the BOI.
The identified guarantors must either be civil servants at level 12 and above aged not more than 53 years or not more than 28 years in service, or bankers who are confirmed as assistant manager or higher, or other recognized professionals or senior staff of reputable quoted companies with a sizeable net worth.
Supporting documents for acceptable guarantees must include a notarized statement of net worth.
Post Approval
If your loan is approved, you'll have to provide some more guarantees before the loan is disbursed to your business account.
Debentures
Before disbursement of the BIO loan, agreements on debentures have to be secured. There's usually asset debentures over all equipment financed via the loan instrument.
This means that ownership of the all financed assets will be in the name of the BOI until after repayment where assets would be transferred back to the participating business.
Personal Guarantees
The Owner of the business or CEO of the company has to provide irrevocable personal guarantee for the company. This means that in the case of default, the CEO has to bear the cost of repaying said loan.
Asset Consolidation and Collateral Registry
All moveable assets used as collateral must be registered with the Moveable Collateral Registry.
Nigeria has a National Collateral Registry at ncr.gov.ng which anyone can use to register moveable assets used for collateral.
Apart from collateral registry, businesses must insure declared assets, with the BOI indicated as the first loss payee.
Loan Disbursement
If documentation and due diligence goes as planned and the loan is approved, the next stage of the BOI loan process is the disbursement of the loan.
The BIO loan usually has a tenure of 3 to 5 years, with participating businesses required to start loan repayment by month 6 to month 12.
Dangote Foundation
The Dangote Foundation has a special intervention fund for SME businesses operating in specific industries.
SMEs in Nigeria that are into manufacturing, agro-processing, and merchandising of 100% Nigerian made goods can qualify.
The Dangote Foundation Fund partners with the Bank of Industry(BOI) to provide loans to these categories of SME businesses, so all applications for this loan have to go through the BOI.
Applicants have to open an account with the BOI using supporting documents such as NIN, BVN, and CAC business registration forms.
Thereafter, the customer identification number for that account will be used to apply for the SME loan.
The Dangote Foundation Loan has a tenure of up to 5 years with an interest rate of 5% for loans up to 10 million Naira.
Dangote Foundation Loan Requirements
The requirements for accessing Dangote Foundation Loan for SME businesses in Nigeria is processed by the BOI.
So, when you open a BOI account, that account is used to apply for the loan, and the BOI will request for documents as at when required depending on the stage of the loan application process.
Also remember that this loan is for only SME businesses in specific industries as highlighted above.
How to Process Dangote Foundation Interest-free Loan
The first step is to identify that your SME business is into wholly made in Nigeria products.
That means you either produce, process or merchandise products that are 100% made in Nigeria.
Then you need to have a business that is duly registered with the CAC and have all your filings up to date.
The next step will then be to approach the BOI and open a company account.
Apart from incorporation documents and means of identification for all directors of the company, new account customers have to submit a schedule of the company's shareholders signed by the company secretary, aka the Shareholders Register.
Thereafter, you can then follow the same process of application and documentation as that of the BOI to apply for a loan.
Jaiz Bank
Jaiz Bank offers tailored Islamic compliant loans for SME businesses in Nigeria.
The loan process with Jaiz Bank is quite different from that of the BOI and other financial institutions offering low to zero interest loans for small and medium sized businesses.
The loan application process in this case is quite rigorous due to the stake the bank tend to have in the businesses accepted for loans.
Since Jaiz bank offers purely zero interest loans, they have to make money from financing qualifying businesses via asset acquisition in the form of profit sharing or marginal revenue collection while often assuming 100% liability for the business.
Due to Jaiz bank operating in line with Islamic finance principles, acceptable businesses must have underlying assets that are tangible and easily identifiable.
This means that loan tenures are flexible and could run throughout the lifespan of the business.
Jaiz Bank Loan Requirements
The requirements for accessing loans from Jaiz bank is pretty straightforward. Interested businesses will first have to open a business account with the bank before applying for a loan.
Account Opening Requirements
- One passport photograph of each signatory
- Government-issued identification document for each signatory
- Copy of utility bill issued in the last three months at the business premises.
- For current accounts, two reference forms duly completed by an individual or company maintaining a current account with a bank in Nigeria
Loan Application Requirements
- Duly completed loan application form available at the bank
- Duly completed personal guarantee form by the owner of the business or the company's CEO
- For companies, a board resolution for the loan is required
How to Process Jaiz Bank Interest-free Loan
After providing the loan application requirements, a feasibility plan for the business has to be submitted so the bank can ascertain the type and structure of the loan.
Depending on the type of SME business, Jaiz bank will recommend different types of loan products such as:
- Murabaha: This product is a working capital financing contract where the bank purchases goods and sells them to the customer at a pre-agreed markup. The customer then repays instalmentally. This product is perfect for customers who need financing for raw materials or to make bulk purchases of goods
- Musharaka: This product is an equity-based financing contract where the bank takes part in the daily running of the business and shares in its profit and loss as agreed in the contract
- Wakala/Kafala: This product is a bond and guarantee contract where the bank create and issue a bond or guarantee for the public to invest in a particular venture or project. Investors are expected to earn a share from profits realized from the project
- Istisna': This project financing contract involves the bank supplying equipment or industrial products on behalf of the customer. The customer then repays the cost of supply as the project progresses. This product is often utilized for construction projects or real estate development
- Ijara: This is a hire purchase or lease to own contract where the bank purchases equipment or machinery and leases it to the customer at an agreed amount and period. The customer assumes ownership of the equipment or machinery after repaying the agreed cost of the hire purchase contract
Jaiz MSME Portal
To start the process of accessing a loan for your SME business with Jaiz bank, you can head over to the Jaiz MSME portal.
On the platform, you'll be guided on the whole process of opening a corporate account with Jaiz bank and developing a business plan that is likely to scale their feasibility checks.
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