Not all lenders are equal. However, most of them pay attention to the same aspects when lending money to borrowers, be it a personal or business loan. The review process for the loan application is important. The paperwork, financial condition of borrowers, their credit history and score, and their ability to repay the loan matter for banks and lending institutions. There are different rules for different loans like a line of credit for business, home loan, commercial loan, real estate financing, or an equipment loan.
There are some lending institutions working round-the-clock to assist businesses looking for funds to buy more machinery and equipment. Besides, there are loan applications to fund accounts receivables balances, as well. However, most banks apply the same lending principles when approving or rejecting loan applications. There is no doubt about the same.
The basic things most lenders focus on are cash flow history, business projections, availability of collateral security, financial statements, tax returns, business plan, and nature of the business. The lender will also consider a business’s market appeal.
According to an article published on https://www.inc.com, a workable asset used as collateral security should have a title of ownership. The banks and other lending organizations will release the funds if they can get back the title. Read on to learn about the three things that lenders must consider before releasing funds to borrowers.
1. The loan purpose
The bank or lender will look at the business plan. The plan must be solid and have a good record of efficiency and performance. The lender will try to understand whether a borrower needs the money for funding his or her personal needs or for the business. If the lenders find the reason and purpose genuine, chances of approval are high. However, lending agencies may feel skeptical if they find a borrower too desperate to take a loan. Therefore, banks will also look for the specific reason for a loan application, how the funds would be used, and how the repayment will be done.
Coming back to the business, the bank or lender will look at things like business summary, product and service offerings, competition in the market, the experience of the management team, financial reports, and target audience.
Once the banks understand a business and its operations, the loan purpose, and repayment methods, the banker will assess the loan risks employing the five C’s. These include collateral, character, capital, conditions, and capacity.
2. Credit history
Whether it is a business loan or a personal loan, the lending banks and agencies will review the credit history of the borrower. However, if you own a startup, the bank may not look into the credit report. A small business loan requires a personal guarantee as well as a personal credit history though.
The banks always recommend borrowers to keep their personal and business credit history in place before applying for a loan. It makes the approval process easy and convenient. There is no doubt about the same. The lenders advise borrowers to correct any erroneous entries in their reports so that it does not affect the loan application.
The borrowers must try to figure out which credit-reporting agency the lender is associated with and ask for a report from that agency. Besides, if you want to learn more about loan eligibility and easy approval tips, look up platforms like Liberty Lending or similar ones.
Before approving a commercial loan, the bank or lender will assess the credit report of the business. If the company has been operating for some time, the bank will ask for the Business Information Report. If the report is not available, the lending agency will also look for some basic details related to the company.
The traditional lenders will ask for a minimum of 4-5 trade experiences mentioned in the report. If they are happy with the report, then conventional banks will consider the creditworthiness of the business. A bank will expect a few credit purchases to ascertain a credit history for a business if it is operating with personal assets and without credit. These little things matter to banks or lenders and accordingly, they will release the funds.
3. Collateral options
The lenders will ask for collateral security in case of a secured loan. To the bank, it is some property that helps borrowers to apply for a secured loan so that the financial institution can use the collateral in case of a default. The banks will seize the property, be it a home or vehicle if the borrower is unable to repay the borrowed amount.
When banks and lenders ask for collateral, they want to reduce the risks associated with the loan. The debt against the property will ensure that the bank will get back the money if there is non-payment. The lending agencies will try to match the collateral type with the loan applied.
The usability of the collateral should typically meet or exceed the loan tenure. If that does not happen, the lender’s secured interest will take a backseat. The lenders will not accept short-term assets like inventory and receivables as collateral security for a loan extending for a long time. The collateral also depends on the amount of loan. For huge amounts, greater security needs to be attached. However, inventory and receivables are fine for a short-term loan such as a line of credit.
If the collateral happens to be real estate property, a title insurance company will perform a search of public records. The lender will have a priority claim on the attached property to secure the loan. Therefore, the bank will definitely search public records to ensure that there are no prior claims to the property or claims filed on a previous occasion.
A creditor or lender will perform UCC search of the public records to discover prior claims to the property. The title search cost or UCC search needs to be borne by the borrower as part of the debt closing costs.
Lenders will focus on these aspects. It is essential for approving a loan application, especially business debts. The borrowers must have all paperwork and other details in place for a hassle-free approval process.