They say, “Bank will lend you a loan only when you do not need it.” Well, this is true to a greater extent. However, it highly depends on the fact of how you are approaching for the loan. In total, there are four types of business loans; named as long-term loans, short term loans, lines of credit, and alternative financing. However, the terms and conditions of these loans vary from each other, and each bank has its own set of policies and eligibility criteria regarding lending and borrowing.
If you happen to manage all that efficiently, it can only increase your chances of securing the loan successfully. Therefore make sure to fill the loan application after getting informed about all the ins and outs, borrowing policy, returning policy, and interest rate thoroughly. Furthermore, be mindful of choosing the type of loan, prevailing financial condition, credit management or score, loan term, APR (Annual Percentage Rate), business plan, penalty charges, down payment limitation, and finally, the bank’s reputation. If you have prepared yourself enough and worked on all these required items, then you can answer the bank’s concerns very quickly.
WHY DO YOU NEED A LOAN?
What is your purpose behind seeking a loan? Why do you need it? Where are you planning to spend the amount? Banks need to know the use of your loan, and you are supposed to persuade the lending party that the loan money is going to spend on a worthwhile venture. Also, it will add positively to the overall economy and be able to raise the total worth of the business exponentially.
How can you do this most effectively? Only by establishing a healthy business plan and figuring out the efficient repayment method. That further means that you need to pass the bank’s 5 Cs evaluation test successfully. These 5 Cs evaluate the risk factor and help bank understanding of whether the borrowing party is reliable or not:
1. THE CHARACTER
The character of the borrowing party enables the lending party to understand the history of the borrower better. His or her level of qualification, success history, past experiences, criminal background, family profile, credit score or history, and industry knowledge are needed to counterbalance the effects of mistrust. The lender needs to know if the borrower is capable of managing the payment or not.
Collateral required to testify the capacity and capability of the borrowing party. It is a guarantee that the lending party likes to take to save their borrowed money. However, it depends wholly on the type and amount of loan, but in most cases, banks want to take property as collateral.
3. THE CAPACITY
The capacity to repay is the capability of business in which the borrowed money has spent, and the borrower is required to ensure that the company is profitable enough to follow the repayment plan even in the adverse economic conditions. To verify this, banks assess the debt-to-income ratio over a certain period and analyze the rate of overall cash flow. A reliable business loan calculator can help to calculate the time at which a borrowing party can return the loan payment. The calculation is straightforward and takes monthly cash flow in factor and calculates the overall interest rate. That eventually helps in deciding the loan payment and devising a returning plan.
4. THE CAPITAL
The capital is the most fundamental investment of any business. Banks find it more relieving if the capital investment of that particular business belongs to the borrower himself. If the borrower has himself or herself not invested in the market, then why should a bank do so? Additionally, if the owner has spent his or her money, then he or she may be more careful in making decisions, taking risks, and avoiding extempore decisions.
Also, banks like to invest in companies that already have enough capital, and they only need extra cash to extend the business scale. Instead of the parties that are thinking about taking the initiative or have just started a small startup.
Prevailing economic conditions play an essential role in deciding the fate of borrowing parties. It doesn’t matter how good is your business plan, your knowledge, how promising your business future is looking, and how good is your credit score. If the ongoing economic conditions and the stock market are not showing positive behavior, then all of these are utterly useless. Besides, political situations and industry trends are also essential to consider while creating a loan application. To which industry are you going to invest? How much profit is it? How much are you closer to your niche market? For example, since the invention of social media, digital marketing has taken over the place of print media and caters to a broader market comparatively. However, print media is almost coming to its end now and has only remained limited to packaging mostly.
Therefore this is a high time to invest in digital platforms in comparison to print media. Furthermore, political scenarios or social conditions also became a barrier sometimes. Nowadays, the Coronavirus outbreak has scathed global economic health and has dropped several international stock markets drastically. It has restricted business opportunities worldwide. The United States market drops almost 6%. In such conditions, getting a loan becomes extra tricky as it is not in the hands of the borrowing party and can ruin the whole planning and work of months.
HOW TO AVOID FAILURE?
Banks expect you to prove your worth and ability. For that, you required to pass through an extensive testing procedure that has described above. Most of the borrowers do fail because they work on the application process wrongly. They give preference to the factors that are not of much significance and ignore the important ones. If you want to avoid failure, make sure to keep a check on your credit score, decide a bank that offers the most suitable terms and conditions, make sure to have a healthy cash flow operation in the run, and gather all the required documents beforehand.
Furthermore, banks prefer those who are confident and seen as a trusted member of society. For that matter, you need to get your past tax files in check, clients’ profiles aligned, business reports together, and all the tangible assets well defined before your lending party to improve your odds of being approved. Also, check the lenders’ requirements thoroughly before making your pitch. Make sure to look for the minimum credit score because if your credit rate is lower than the required level, it will be marked by the bank as unfavorable. Secondly, check the debt-to-income ratio, and try to lower it by raising the credit score. Thirdly, make sure to have a consistent and positive employment history because some lenders do give extra consideration to this fact and can cancel your request based on this factor alone.
THE FINAL SUGGESTIONS
After doing all of this, if your application still gets denied, then consider writing a letter and try to learn the reason for cancellation. Secondly, you can get your application authorized by some authority, big party, or even get it referred by some trusted and well-established industry leader. To have a co-signer, you can improve the rate of success remarkably. And lastly, make sure to work on the factors that become the sole reason for cancellation and re-apply at the same bank because banks are investing money for your business, and doing that, they require your guarantee and surety. If you are under the impression that banks are likely to give you a business loan based on your business idea and capabilities alone, then, unfortunately, you are making a huge mistake. The lenders are not here to do charity but like to do profitable business and only prefer the parties that have already gained a name in their industries and need the loan to extend it further.