What Do Banks Look for When Reviewing a Loan Application?

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Finance

A loan from a bank can bring success to your small business. If taken at the right time, a small business loan can help a company expand, provide capital, pay their debts, and become successful. When you go to a bank with your loan application, there are certain things a lender looks at. Different banks have different rules and requirements, but there are few things that are the standard and are looked upon by every loan lender.

Whether you are applying for a small business loan, an equipment loan, a real estate loan, commercial short-term loan, or a line of credit, there are few ‘Cs’ you should focus on. If your business is thriving in these areas, then the chance of you getting a loan is quite high. In this article, we will explain what those ‘Cs’ are, and how they can support your loan application.

Credit History

The first thing a lender will review is your business’s credit history, and because most loans require a personal guarantee, they also analyze your personal credit history. That is why before you apply for a loan, make sure your credit history is good enough for getting the loan approved. For maintaining a good credit score, avoid any late payments, foreclosures, bankruptcies, charges, and pay all your bills on time. Different banks have different credit criteria, so before applying for a loan, make sure your credit history meets all those requirements. If you can find out which company your prospective lender uses for credit reporting, then you can review the report and correct any errors before they become a problem.

Capacity

Before a lender can grant you your requested loan, they must make sure you have the capability of paying the loan back in time. If a borrower is incapable of paying their loan, then their application is rejected right away. The ability to repay your bank loan is called capacity. When a lender reviews a loan application, they use your monthly income information to calculate two things, your history of repayments, and the amount of debt you are in. Based on your income, they compute your debt service coverage ratio. Different banks accept different rates, but the minimum acceptable debt service coverage ratio by most banks is 1.20.

Capital

What is Working Capital Financing? Capital is the amount of money a company must work with; it is the cash flow of how much money comes in and goes out. When a loan lender looks at your application, they calculate your company’s capital. If your company is not well-capitalized, the chances of your loan getting approved become very low. The bank also analyses your commitment to the success of your business, which they see by how much capital you have invested in your business. A business owner with a good capital investment comes off as a prospective borrower. If your business’s capital is not strong, but you have a solid personal financial position, then you can get a loan based on your personal guarantee.

Collateral

When it comes to acquiring business financing, providing collateral is necessary. This is because even the most reliable business can become a victim of such circumstances in which they are not able to pay back the loan. The bank requires collateral, so its own interests are protected. For a bank, collateral is like a property, so in case the borrower is unable to pay back their loan, the lender can seize that property. The type of collateral can vary according to the available equity of one’s business; this includes assets like real estate, equipment, business properties, vehicles, and bank accounts. When you sign your loan documents, you give the bank the authority to have their claim on whatever asset you have stated as the collateral. In case you are not able to pay back your loan, the bank has the right to seize and sell the assets they have a claim over, to make up for their losses.

Character

Character plays an important role in getting a loan approved. This area may not be as important as other things like credit history, capacity, or collateral, but it still matters. It can be the reason why your loan does or not get approved. When applying for a business loan, the lender will look at the history of your company, like its reputation, your references, as well as your debt and repayment history. If all these things look good then you can likely get a loan, if you meet the required criteria. But, if your company has a poor debt history, poor services, and a disreputable name, then the bank may not want to do business with you, even if you meet their loan criteria.

Conditions

Conditions here mean the economic state of the industry that surrounds your business. This is a criterion that is not in control of the borrower. For some banks, the economic climate may not matter, but most banks consider it in order to save themselves the trouble from delinquent borrowers. Your business may have the required capacity and collateral, but if you work in an industry that is under high-risk, then the bank may not approve your loan. The reason for this is because the industry you work in has the chance of sudden fall, which the bank cannot take a risk with. To overcome such issues, it is advised to portray your best strengths on the loan application.

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