December 2, 2022

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What Does A Bank/Financial Lender Look For Giving A Business Loan?

What Does A BankFinancial Lender Look For Giving A Business Loan

Introduction

Every business owner’s journey is unique, but many will come to the same conclusion: how can I make my firm grow? Knowing your company’s cash flow and how to maintain it successfully are critical components for growth.

Your company’s cash flow cycle defines how your goods or services yield money for ongoing business operations, business expansion, loan repayments, and profitability. When your business has a lot of cash on hand, it’s easier to pay staff, vendors, and contractors on time and put money back into the business.

However, if prospects for expansion, such as hiring additional employees or acquiring new equipment, will place a burden on your cash flow, it may be time to examine other options. A business loan or line of credit may allow you to take on greater projects and manage business development while still maintaining a solid cash flow. It may be obtained from a variety of sources, including crowdsourcing, banks, NBFCs, angel investors, and so on.

Lets see what the lender asks before granting a loan:

 

History of Credit

A strong credit history is usually a top priority for banks when it comes to lending. If you or your company does not have a strong credit score, your prospects of securing a business loan are slim. Lenders are constantly concerned about repayment, which is why they monitor your personal and commercial credit scores.

Typically, banks prefer to lend to individuals with personal credit scores ranging from 700 to 750. A good credit score suggests an excellent credit history and strong money management abilities, such as paying payments on time. A CIBIL of less than 680 indicates a poor credit history, and banks view you as a possible danger in terms of payback.

 

Overall Economic Situation

Bankers will examine the entire economy, business developments, and even the direction of politics in addition to the borrower. They are considering issues outside the business owner’s control that will have an impact on the company’s performance.

It is nearly difficult to establish a new firm and finance its expansion only with internal money and the capital of the founders. Micro entrepreneurs will have to approach their banks for financing at some time. Before you apply for a loan, learn about the procedure that lenders use to assess their risks.

 

Flow of Cash

Banks perceive a company with a poor cash flow to be a possible risk. A poor cash flow may signal that you may prioritise your business expenses and costs above your credits. Banks look for the business’s a bank statements as well as the owner’s personal bank account statement. This provides lenders with a clear picture of the business’s cash flow and profits.

The good part is that you can enhance your cash flow (if it is low) by doing a cash flow analysis of your firm, defining targets, and implementing a well-defined payment strategy in place.

 

Collateral

When lenders want a guarantee for secured credit, they are attempting to reduce the risk involved. To ensure that the specific insurance provides enough security, the moneylender must coordinate the type of security with the credit being issued. The collateral might be anything, such as real estate or expensive commercial equipment or machinery.

Also Read=>  What Kind of Banks Give Student Loans?

 

Ability

The lenders want to guarantee that the loan is fully repaid, and your ability to do so is described as your capacity. When you apply for a loan, you enable the lender to analyze your credit history, bank statements, and last year’s ITR to determine your capacity. This allows a lender to assess your payback history for prior or ongoing loans. Your transactions once again show the debits and credits you presently have.

After reviewing all of these factors, the lender calculates your debt to credit ratio to determine whether or not to accept or reject a specific business loan application.

 

Ratio Agreement for the Future

Most commercial loans have loan covenants, in which the firm commits to keep certain critical ratios—for example, quick ratio, current ratio, and debt to equity—within specific predetermined levels. If your financials fall below certain particular limits in the future, you will practically be in loan default.

 

Capital is Required

Banks are more confident when the entrepreneur has put his own money in the firm. Lenders like to know that the owner will lose money if the firm fails. Why should the bank invest in the owner’s firm if he isn’t?

Banks like financing to organization’s with a large amount of money since it indicates that the owners have some “skin in the game.” When business owners have more personal capital invested in the company, they will battle harder and make greater sacrifices to rescue the company and return their obligations.

 

Documentation

There can be no business without documentation. Documents are required at all times in order to start, operate, and develop your business. Varied lenders have different qualifying criteria for approving business loans, but the majority of them demand the same documentation.

The Following is a list of a few banks’ Documentation Requirements –

  • Identity Proof- Driving License / PAN Card / Passport / Voters ID Card / Aadhaar Card are acceptable forms of identification. (anyone)
  • Address Proof- Ration card/telephone bill/electricity bill/passport/trade license/lease agreement/sales tax certificate (anyone)
  • Income verification- a bank statement from the last six months.
  • Financial Documents- Last two years’ ITR, as well as computations of Balance Sheet, Income, and Profit & Loss a/c for the previous two years.
  • Proof of Business Continuation Business Ownership Proof- Other Mandatory Documents such as a Sole Proprietorship Declaration, a Certified True Copy of the Memorandum and Articles of Association, a business license, and contracts signed by an authorized authority.
  • Financials for the last three years have been audited.

Submitting these paperwork demonstrates that your company is lawful, and hence lenders are willing to lend to such organization’s.

 

Conclusion

Although each financial institution has its own set of criteria for determining a company’s creditworthiness, these are the most typical techniques. Overall, the bank and the business owner should develop a good partnership that suits both parties’ requirements. This guarantees that your company obtains funding to develop, and that the bank has safeguards in place to protect itself.