Today's part focuses on considerations that determine if your loan application will be successful or not. It should be noted that to be successful, the loan applicant should be thinking like the banker who is going to appraise the application.
Below are the first three of the five considerations (we shall treat the other two next week):
The loan amount
Two major considerations are: how much is the loan in relation to the actual amount needed for the business (there is a model for calculating this which is not part of today's article), and how much is the loan in relation to the amount the borrower currently has in the business.
In the first consideration, the lender wants to be sure the borrower is not overstating his financial needs.
It is also important for the borrower to be careful not to obtain loans/ funds that would not be fully applied, otherwise he will be carrying higher cost burden.
In the second consideration, banks believe that if the customer has a reasonable amount of his own in the business, he will be more committed to its success. It also demonstrates the seriousness of the business as a going concern; thus reducing the lender's risk.
Purpose of the loan
The purpose and how the loan will be utilised should be clear to the banker before he considers lending. The stated purpose must be in line with the bank's credit policy while guiding the application of the fund against possible diversion.
It is also important for the borrower to stay focused and demonstrate his business plan integrity to convince the lender that his money is safe.
Term/ period
Two basic factors are considered here. The first is the nature of 'loanable' funds available in the banks; and the other is about the requirements of the business.
Since most of the deposits in the banks are short term, most loans are also short term, ranging between three months and one year.
In few cases, it is shorter than three months and longer than 12 months. If it is an overdraft granted to a business customer for three months or six months, for example, it can still be renewed for another three months or six months, provided the account is conducted satisfactorily by the customer.
The nature of the business may easily fit for this deposit structure in banks; for instance, an import business will easily fit into a three months loan. Even if it is not, the business cycle will be restructured to fit into the loan structure.
