Bankers are the people who deal with a lot of businesses in various industries, while 99.99% of the businesses are in need of loans to manage their cash flow or to increase their assets, only a few businesses are successful in getting their business loan application approved. As a banker, I have noticed that there are a lot of resources available to advise you about things to consider before you apply for a loan. But there is a huge disparity between the criteria of bankers and those so-called resources.
Your chances of securing a loan are questionable if you don’t understand what your banker will look at. Don’t worry, this article will help you to understand the way a banker thinks and looks at your business loan application.
Bankers work on strict credit criteria and following are the key areas they look in to
Experience & Knowledge in the industry you operate
Do your homework before submitting your loan application as bankers will test your knowledge in the industry you operate, you are one step closer if you have experience in the field and have very good knowledge in the industry, submit your business proposal in a professional manner and don’t be stingy to consult a consultant to get it prepared. The first impression you create on the interview with the loan officer is very vital. Having said that, bankers do consider the industry you operate and how the industry performing in the market.
Eg: Currently banks and finance companies are not encouraging loan facilities to condominium developers and the construction industry
Track record / past payment record
Have you noticed your loan officer looking at the computer screen very deeply while talking to you? Probably he was looking at your Credit report, most of your banking transactions reported to CRIB and the crib report is a very important tool used by bankers. It simply shows how discipline you are in servicing your debts. Irregular CRIB may result in rejection of your application. Do a credit check before applying for a loan and follow the recommendation of the credit report to sort-out the irregularities, this practice may save your application from rejection
The next big thing is your cash flow, I recommend to open a current account or a savings account at a bank of your choice and route all your transactions through the account. Account statements will help the bank officer to analyze your cash flow and it’s a trustworthy source of cash flow analysis. rarely a loan gets approved without the bank statements. Operate your account at least for 6 months and make sure that your transactions on the statements justify the business proposal you submitted.
Bankers analyse your accounts for two reasons, one is for analysing your overheads and expenses and second is for to understand your discipline. Make sure to have a record for each and every transaction of your business. It a definite advantage, it simply demonstrates the best business practices you maintain.
Gross/net profit margin
No matter how huge is the turnover in your current account, bankers look into the profit margin you make in order to analyse your debt servicing ability. Your business proposal and cash flow have to be in line with the profit margin you operate, bankers will use various ratios to analyse your financial position and repayment capacity to justify your loan application.
This is also a subjective area, net worth simply means the difference between your assets and liability. Having positive net worth is a definite advantage to get your loan proposal approved, but relatively new businesses might have negative net worth and bankers understand that too. Having said that, huge negative net worth is a killer and results in rejection.
The strength of the collateral
Trust me, collateral comes last, Collaterals are subjective and sometimes banks may grant the loan without collateral. Make sure to offer reliable and easily realizable collateral when your loan application requires collateral. A prime property or a marketable vehicle is attractive collateral to the banker. In most cases, loan officers will ask for collateral when they are OK to grant the loan and still there is a small doubt on the proposal. Offering collateral beforehand might help the bank officer to consider your application favourably.
Relationship with financial institutions
This is not in the criteria, but an effective strategy, Make sure to have a very good relationship with your banker and financial service providers. Start dealing with a bank as soon as you start your business, start small and slowly and gradually increase your relationship with the bank officers, it doesn’t mean you have to take them for dinner and give valuable gifts, most of the bankers like to deal with responsible and disciplined business owners.
We have made a comprehensive listing from a banker’s viewpoint and we recommend you to do your research before applying for a loan and most importantly apply for a loan only when you need it.