We continue our series on using bank loans to finance your start on business. This blog post is the fourth in the series. Previous posts are available at our archives; just a click away to your right.
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COMMERCIAL PAPERS (CP’s)/NOTE ISSUANCE AND BANKER’S ACCEPTANCES
This is a way of raising capital where the bank simply shops for investors on behalf of their customer.
The bank customers will issue promissory notes to the investor the bank finds for him/her. Here therefore, the bank does not lend out its existing funds.
For CP’s the bank is not in any way liable to the investor as the bank did not underwrite the credit but for the notes, the bank has liability up to the un-invested portion of the credit.
Where the bank further provides a guarantee on the investment taking full liability, it becomes a banker’s acceptance instrument.
OVERDRAFTS
Overdrafts are long term/short term, collateralized/uncollateralized credit instruments granted by banks to their customers mainly to support their cash flow or working capital.
It allows the customer to draw beyond his account balance up to a defined amount and for a maximum defined period by which time the customer is expected to have paid off/regularized the negative balance position of his/her account balance.
GUARANTEES
A guarantee is usually a contract of liability called a contingent liability for which a bank pledges on behalf of its customer to a third party (who may/may not be a customer of that bank too) to pay up sums advanced to or already paid to its customer if based on defined terms such a customer does not deliver on a contract/job as required by a third party.
From all the foregoing, the following should be noted:
• The bank will only do business with you as their customer, so go open a bank account today if you have none.
• Your banker will always act as your financial adviser as a way of protecting your interest and their funds for every transaction they are engaged with you in. whenever you open an account in the bank, an officer is assigned to you as your account officer who intermediates for you and advices you (if need be) concerning your financial transactions with the bank.
• The bank in Nigeria today can do so much or at least something for you if you are a customer of theirs.
• There is no valid transaction that is not bankable; there are just some people that are not bankable.
• Having a bank account especially a business checking account gives some form of credibility to your business.
• If you can do without a bank loan, don’t take it; but using a bank loan follows the principle of other people’s money which is the fastest way of growing your business.
By next post which is next week we conclude this series and start a new one on outsourcing.
Please read a book today.
