Long-term loans are structured to be paid back after 3 years or more while medium-term loans are structured to last more than one year and up to three years. These loans are usually in the form of large disbursements for the purchase of capital assets such as factory plants and equipment. Interest rates are normally lower because long-term loans are often secured with property or other assets. The financing allows you to invest in major capital assets that you would otherwise have to wait years for by slowly saving profits over time.
Accessing medium to long term loans usually require more rigorous documentation and is sometimes coupled with a request for collateral/security and guarantors.
Ebuka worked for a food processing company in Lagos for 5 years between 2004 and 2009 where he gained knowledge on how to preserve food staples such as Yam and Sweet Potatoes by drying them.
During the same period, he also noticed that his household expenses for Onions, Ginger, and fruits varied significantly across the seasons and were very expensive at certain periods and became very cheap at their peak harvest periods. While the dried types of these items were available but they were often sold by informal traders, and buyers complained that the ground and dried Onions, Garlic and Ginger were often unhygienic and or adulterated with other products.
Ebuka did a survey of various supermarket chains and open markets and concluded that there was significant business potential in drying these food items. Ebuka decided to resign from his job in 2009 and started his own food processing business in the same year.
He started his business with personal funds and some loans from family and friends which amounted to N5, 000,000 (five million Naira). After 3 years, the customer base which included all the major supermarket chains in Lagos expanded and Ebuka prospered. However, during a visit to his home town in Anambra State, he realized that the entire South-East was very reliant on the fresh Onions, Garlic and Ginger grown in Northern Nigeria and faced the same seasonal product price variations and seasonal scarcity witnessed in the Lagos area. Ebuka knew that there was a huge untapped market for these dried spices and he decided to expand his business first to Onitsha and then the entire South-East eventually.
To achieve this he would need more machines and working capital for increased production. Ebuka had already repaid the initial loans he got from his family and friends; his sales turnover had grown exponentially over the years and had hit about N80 Million in 2018, but he needed more money for this expansion project. He contacted his bank account officer about getting a bank overdraft of N60, 000,000. After Ebuka disclosed what he required the overdraft for, his account officer warned him against using bank overdrafts (overdrafts are short term loan facility which lasts for about 12 months or even less) to fund capital assets such as equipment which are supposed to be used for over one year and also have a payback period that will exceed the duration of the overdraft. He advised him instead to apply for a long term loan from a Central Bank Intervention fund (managed by various participating banks) or through a Development Finance Institution such as the Bank of Industry (BOI).
Ebuka’s account officer explained that while such medium to long term loans are readily available but the documentation requirements were quite detailed. Thus such loans are better suited for companies that have kept very detailed records of their operations and have established market share. Fortunately, Ebuka had learned the importance of keeping business records from his experience at the large food processing company he worked for in his early career so the documentation for a long term loan will not be a hurdle. Over the years, while he paid back the loans he took from his family and friends, he reinvested his business profits and personal savings in landed property. He also planned to use this landed property and the current and proposed company assets to secure the long term loan. Ebuka eventually got a loan from BOI at an interest rate of 9% per annum.
Which Companies qualify for Medium to Long term Loans?
In our previous post, where we discussed Quick and Easy Business funding for MSMEs, we also noted that MSMEs typically grow in stages which include; early stage, expansion stage, and later stage.
Once the MSME has reached the expansion stage, it would have gained some market share and has started to make profit. As the MSME continues to grow, it gains stability and profit margins continue to increase, it moves to the later stage. At this stage, MSMEs evolve into large enterprises and can raise very large long term equity funds from several sources including IPO (Initial Public Offering) on the stock market, private equity firms, corporate debt, mezzanine finance and more.
Note that these types of fund providers require the MSME to submit very detailed documentation, have significant market share, revenues and profits and is transitioning to become a large enterprise. For bank loans or corporate debt, the MSME has to provide collateral in some instances, but the collateral requirement is de-emphasized if the MSME has transitioned to become a large enterprise with dominant market share, valuable fixed assets and relatively low borrowing levels. In such cases, the borrower might accept a negative pledge from the company which means it has not and will not pledge its assets as collateral to any borrower to ensure that all borrowers have equal rights to its assets in the event of loan default.
Conclusively, it is often easier for MSMEs at the expansion or later stages of growth to meet the requirements of financial institutions for long-term loans.
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