When you need financing for your business, you reach out to banks for assistance. Banks can then decide to assist you or not depending on various factors, and that’s fine. Maybe you did not meet the criteria required or you failed the loan-application process.
Whatever the case one thing remains certain: banks do not operate the same way. However, many of them review loan applications in a similar manner. It is upon you to understand the loan application process, and the narratives involved to secure the best loan for your business.
It is important to understand what banks mean by business projections of your business in a particular period of time, documentation involved, etc.
Whether you’re applying for real estate financing, equipment loan, commercial short-term loan, or a personal loan for startup capital, this post will help you learn what banks look out for when reviewing loan applications.
What Lenders Concentrate On
As earlier mentioned, the loan review process follows basic principles that are all too common in almost every bank, or with prospective lenders. So most loan applications have similar characteristics of what’s required:
- The prospective lender will ask for your credit history.
- Lenders will ask for collateral prior to securing a loan.
- The lender will also inquire of your cash flow history and your business projections over a period of time.
- They will also judge your character and personality.
- Some lenders will ask for documentation – that is, tax file returns, business plan, bank statements, evidence to prove you are the legal owner of the said business, etc.
Business and Personal Credit History
Your personal credit history matters as much as that of your business. Banks will review your histories to ascertain if you’re a good fit. This is to help them discern whether you’ve been making constant payments on previous loans or whether you’ve defaulted on them.
Before you apply for a business loan, make sure to obtain your credit report both for your business and for yourself. Go through the report for any inconsistencies or anomalies.
If you do find any problems on the report, identify areas that need rectification and file a dispute lest it affects your applying for a loan. The earlier you do this the better.
Remember, most lenders or lender’s matching website report your loan repayments to a credit reporting agency. To get a good understanding of how your report looks like, request a loan credit report from the said company or agency. Reviewing your credit history prior to applying for a loan will give you an added advantage. You’ll have rectified errors or anomalies that can affect your loan process.
Collateral
To secure a loan, banks will insist on your providing collateral. This is a must. Collateral provides security for the lender in case you default on the payment. It is this collateral that lenders will seize if you fail on your payments.
Security can be anything valuable, and it can be in any form including property, vehicle, estate, title deed, etc. When lenders demand security prior to offering financial assistance, they are actually minimizing their risks when extending credit to your startup.
When securing a long-term loan, you need to provide long term assets as collateral. The same applies when seeking short term financing. You’ll be asked to provide short-term assets to guarantee the loan
While using collateral to seek a loan is necessary, banks when want to carry out an evaluation of the collateral to determine its value against the credit given.
This is aptly referred to as the loan-to-value ratio. In other words, if the bank does not accept your loan to value ratio of the type of collateral given, they will not secure you a loan.
History of Your Cash Flow and Future Projections of Your Business
How your business operates, and the amount of money it generates over a period of time, matters a lot when securing a loan from a bank. Lenders will look at your business’s cash flow cycle and inquire about your business projections.
You cannot seek a short-term loan without the bank or lender asking for the above information. The only concern a lender has is how much your business generates, and whether it is enough to repay the loan. How money flows in your business give insights into your money sources and expenditures. It sheds light on your business operations on a financial level.
This information is too important because lenders will have a clear understanding of your businesses market demands, competencies, any relevant changes, and the cycle of your business over a period of time. So make sure to improve your cash flow, and have your business projection details in order.
Character and Personality
Lenders will assess your character. That’s a fact. But this will greatly depend on the lender and the amount of credit you seek.
Character assessment sheds a light on the borrower’s individuality. If you’re planning to sell yourself to a lender or a bank, for instance, make sure to work on your business “character”. Work on certain traits that banks may look out, such as:
- Success in your previous businesses
- Existing lender relationship in the past
- Referrals from respected lending programs and member communities
- Involvement in community projects
- How you plan your business
Relevant Documentation
Documentation takes the lion share of the entire process. It is, therefore, essential for you to collect and submit relevant credentials about your business, or in the case of seeking a personal loan, documents providing personal details.
If you’re looking for startup capital, lenders are most likely to ask for the following documents:
- Proof of ownership – documentation identifying you’re the real owner of a particular given asset or collateral, or even lease or contract.
- Cash flow statement spanning a year
- Income tax statements at least spanning two years
- Bank balance sheets spanning two years
- Business estimates
- Statements highlighting your income tax returns
Conclusion
Before you seek a loan from a lender, make sure to understand what the lender specifically looks out for. The loan application process takes time depending on individuals or a borrower’s needs. Also, it depends on the lender and the type of loan in question.
For instance, loan reviews of an equipment loan will not bear semblance with the process of securing a commercial or personal loan on short-term basis. But they’ll be striking characteristics in the process.
Most lenders focus more on the history of your credit. They will also look into your business future projections and its cash flow cycle. But even so, to secure a loan, you’ll be required to provide collateral. Chances are, most lenders will also judge your character, as well as check your documentation. So be prepared prior to the review process.
