Types of Loans for Small Businesses in Ghana

OXYGEN Financing and Advisory Opening: Types of Loans Available to Small Businesses in Ghana

Ghana’s wealth of resources, democratic political system and dynamic economy, makes it undoubtedly one of Africa’s leading lights. Gaining the world’s confidence with a peaceful political transition and a grounded and firm commitment to democracy has helped in expediting Ghana’s growth in foreign direct investment (FDI) in recent years. The country has attracted the attention of well-known international businesses, investing in all sectors of our economy. All these investors have come to Ghana because they know Ghana has a wonderful conducive social, political and economic environment in which they can invest, grow and be successful.

Ghana has recently embarked on an ambitious but achievable reform programme to improve the investment climate for both local and international investors. These efforts have paid off tremendously with Ghana being ranked the best place for doing business in West Africa, ahead of Nigeria and Cote d’Ivoire, according to the 2017 Ease of Doing Business Report.

To deepen the gains in business and investments, the Ministry for Business Development has been created to promote the private sector in Ghana the ministry was created under the Nana Akufo-Addo administration in 2017 and OXYGEN Finance and Advisory Limited in Ghana has fully integrated its operations into the ambition of Ghana providing the right financial platform for businesses.

There is no gain saying that money makes your business grow. In Economics 101, money is described variously. Some say money is a factor of production that is not wanted for itself but for its ability to help in producing other goods and services. To others it is any form of wealth capable of being employed in the production of more wealth. It serves as capital needed by a business to finance its operations. It is a financial metric which represents operating liquidity available to a business, organisation or other entity, including governmental entity. Along with fixed assets such as plant and equipment, money is considered a part of operating capital.

A business can be endowed with assets and profitability but short of money if its assets cannot readily be converted into cash. Money is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.


Types of Loans in Ghana
To OXYGEN Finance and Advisory Limited, a loan is the lending of money from one individual, organization or entity to another individual, organization or entity. A loan is a debt provided by an entity or organization or individual to another entity at an interest rate, and evidenced by a term sheet and loan offer letter which specifies, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and date of repayment. Acting as a provider of SME loans is one of the principal tasks of OXYGEN Finance and Advisory Limited and the other financial institutions such as banks, finance houses microfinance companies in Ghana. For other institutions and capital market operators in Ghana, issuing of debt contracts such as bonds is a typical source of funding.

In these recitals we will give you some alternatives, strategies, and things to think about in your search for financial help. You will learn how to locate, negotiate for, and maintain sources of money to help you start and expand your business.


Making Things Happen with Loans in Ghana
Entrepreneurs have a wide variety of options when it comes to funding in Ghana.  Below is a list of possible options for a small business to research and consider regarding lender types. Terms will vary considerably from lender to lender; important issues to consider include Cost, Payback program/terms and Loan size. As an entrepreneur, you will be legally obligated to have individual responsibility for the loan obligation of your business. Regardless of legal organization, lenders will have documentation to circumvent the organizational structure.

These are some very popular lending options for small businesses in Ghana (a couple of them have been elaborated to provide clarity): Personal Savings, Friends and Family (Peer-to-Peer), Banks/Non-Bank Financial Institutions and Credit Unions/Associations, Home Mortgages, Micro-Finance Options (including institutionalised funding e.g. Accion, Grameen Foundation, Microfinance and Small Loans Centre/MASLOC, Export Development and Agricultural Investment Funds/EDAIF etc), Equity Funding, Venture Capital, Angel Investment, Commercial Mortgage, Specialized Lenders (Industry expertise, auto, business brokers, high-tech, specialized equipment, etc.) and Finance Houses among others.


Personal Savings as Start-Up Loans
OXYGEN Finance and Advisory Limited understands that money makes your business go. But we don’t always recommend going straight to a bank to get it when you’re just starting your business. Banks normally make loans only to businesses with operating histories.

A banker’s primary concern is your timely repayment of loans. The fuel to make loan payments come from your cash flow. So your management of cash flow is of utmost interest to your banker and you must convince the banker that you are an expert in making cash flow projections that safely include your loan payments. Many businesses can be started with no money at all. You can start small and humbly and grow one order at a time. Such businesses will kick start with personal savings which should be considered the primary source of funds for starting a business. If you haven’t started already, start now to begin accumulating cash through personal savings. Start-Ups in Ghana could also consider loans from friends, colleagues, school mates and family ties. This usually attracts less or no interest and the repayment is flexible.


Informal and Formal Supplier Credit Loans
The Supplier Credit Guarantee Program (SCGP) in Ghana is a general practice where suppliers both in the formal and informal sectors allows buyers to take and hold stock and defer payment to a later date when the buyer is sufficiently resourced to pay the supply values. If a buyer fails to make any payment as agreed, the supplier or assignee (e.g., manufacturing, production and processing or financial institution) will submit a notice of default. This practice is prevalent in all trade practices (eg. From the supply of baby foods, agricultural products, with an emphasis on high-value products and market growth potential to coffins). A business owner or buyer need to assure the supplier of brutal honesty, integrity and a history of cash flow. The quantum of credit one can acquire in such practices depends on how well these social and economic metrics are fairly harmonised. In this system supplier credits which serves as loans are easy to acquire in all shops and spaces. Individuals and businesses in Ghana may use this to get their stocks and inventory while waiting to get paid, as a barter to finance payroll and rent, to acquire equipment and fixtures, in getting a computer or phones, and also often used in buying a business. Prioritize those areas where your options are limited to paying in cash, and review your alternatives where there may be another way.

Leasing Finance and Loans
In Ghana it is not necessary to pay all cash for a delivery truck, equipment, vehicle or software when you can rent or lease one. A finance lease (also known as a capital lease) is a type of lease in which a finance company is typically the legal owner of the asset for the duration of the lease, while the lessee not only has operating control over the asset, but also has a substantial share of the economic risks and returns from the change in the valuation of the underlying asset. More specifically, it is a commercial arrangement where: the lessee (customer or borrower) will select an asset (equipment, vehicle, software); the lessor (finance company) will purchase that asset; the lessee will have use of that asset during the lease; the lessee will pay a series of rentals or instalments for the use of that asset; the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee and also where the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price). A finance lease in Ghana has similar financial characteristics to hire purchase agreements and closed-end leasing as the usual outcome is that the lessee will become the owner of the asset at the end of the lease, but has different accounting treatments and tax implications. There may be tax benefits for the lessee to lease an asset rather than purchase it and this may be the motivation to obtain a finance lease.


Hire Purchase Finance and Loans
Just as practiced in many economies, Ghanaian businesses and aspiring business leaders and entrepreneurs may acquire financing through the use of hire purchases or payments on instalment plans. A hire purchase (abbreviated HP) in Ghana is very popular arrangement whereby a customer acquires an asset by paying an initial instalment (e.g. 10% of the total) and repays the other part of the cost of the asset over a period of time or term for a contract, in which a purchaser agrees to pay for goods in parts or a percentage over a number of months. This is heavily relied upon where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal instalments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum). If the buyer defaults in paying the instalments, the owner may repossess the goods. HP is frequently advantageous to consumers because it spreads the cost of expensive items over an extended time period. Business consumers may find the different balance sheet and taxation treatment of hire-purchased goods beneficial to their taxable income. The need for HP is reduced when consumers have collateral or other forms of credit readily available. In Ghana these contracts are most commonly used for items such as car and high value electrical goods where the purchasers are unable to pay for the goods directly.


Home Mortgage Finance and Loans
In Ghana, a mortgage loan, also referred to as simply a mortgage, is used either by purchasers of real property to raise funds to buy real estate; or alternatively by existing property owners to raise funds for any purpose, while putting a lien on the property being mortgaged. The loan is “secured” on the borrower’s property through a process known as mortgage origination. This means that a legal mechanism is put in place which allows the lender to take possession and sell the secured property (“foreclosure” or “repossession”) to pay off the loan in the event that the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a “Law French” term used by English lawyers in the Middle Ages meaning “death pledge”, and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure.

Mortgage can also be described as “a borrower giving consideration in the form of a collateral for a benefit (loan).” Mortgage borrowers can be individuals mortgaging their home or they can be businesses mortgaging commercial property (for example, their own business premises, residential property let to tenants or an investment portfolio). The lender will typically be a financial institution, such as a bank, credit union or building society, depending on the country concerned, and the loan arrangements can be made either directly or indirectly through intermediaries.

Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably. The lender’s rights over the secured property take priority over the borrower’s other creditors which means that if the borrower becomes bankrupt or insolvent, the other creditors will only be repaid the debts owed to them from a sale of the secured property if the mortgage lender is repaid in full first. In many jurisdictions, it is normal for home purchases to be funded by a mortgage loan. Very few individuals have enough savings or liquid funds to enable them to purchase property outright in Ghana. In countries where the demand for home ownership is highest, strong domestic markets for mortgages have developed. Mortgages can either be funded through the banking sector (i.e., through short term deposits), or through the capital markets through a process called “securitization” which converts pools of mortgages into fungible bonds that can be sold to investors in small denominations.


Bank Loans (Debts)
Debt is money owed by one party, the borrower or debtor, to a second party, the lender or creditor. The borrower may be a sovereign state or country, local government, company, or an individual. The lender may be a bank, credit card company, payday loan provider institution, or a microfinance or non-bank financial institutions. Bank debts are generally subject to contractual terms regarding the amount and timing of repayments of principal and interest and security or collateral provided.

The Commercial and Universal banks in Ghana are a type of financial institution that provides services such as accepting deposits, making business loans, and offering basic investment products. Commercial bank can also refer to a bank, or a division of a large bank, which more specifically deals with deposit and loan services provided to corporations or large/middle-sized business – as opposed to individual members of the public/small business – retail banking, or merchant banks. A bank loan entails the reallocation of the subject asset(s) for a period of time, between the bank and the borrower. In a bank loan process, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time.

The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Although this recital focuses on monetary loans, in practice any material object might be lent to support businesses and individuals.

For a business loan, the most common things are: Business financial statements, Business tax returns, Business plan with budget or projection, Personal financial statements, Personal tax returns. Be ready to answer questions about your business, and be ready to highlight your financial performance both in the past and in the future. You will be more impressive if you have carefully thought out and become familiar with your plan. Be prepared to tell lenders why you need the money. “I just need the money,” does not inspire confidence or the fact that you have thought it through.


Capital Markets and Equity Loans (Facilities)
Equity is where the money raised gives the investor an ownership interest. This is common in the sale of stock to a limited number of investors or participation by venture capitalists. The sale of stock is highly regulated by Government and Bank of Ghana (as a regulator) and you will need the help of a corporate investment representative/advisor. Sometimes such a discussion arises with friends and family who want to be your partner. Consider this carefully because they will then participate in the increased value of the business and have voting rights. A stock market, equity market or share market is the aggregation of buyers and sellers (a loose network of economic transactions, not a physical facility or discrete entity) of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange as well as those only traded privately. The Ghana Stock Exchange (GSE) plays this market role perfectly.

Are you starting a small business in Ghana? Or looking to expand your business with an SME loan and want to learn what options are available to you? Contact the lenders and financial advisors at OXYGEN Group Limited. We are here to help your Ghana business succeed.


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