Applying for a loan is not always a bad venture. One way or another, you are going to need large upfront cash and eventually resort to borrowing money. It can be for an investment such as a small business, family vehicle, college tuition, or real estate. For huge investments and ventures such as these, applying for a loan might be the smartest move you could make.
Fortunately, there are now a variety of professional financing options to take such as credit unions, P2P, and 401(k) plans. But among all others, banks are our trusted and usual go-to when it comes to financing. However, qualifying for a bank loan remains a mystery to many.
Applying for a bank loan is a tedious process, and getting approved is an equally difficult feat. Lenders are becoming strict and require many paper works and credentials, only to get rejected after months of torturous wait.
Of course, you want to put your best foot forward and present a perfect package to get that much-needed “Approved” sign. To help you, here are the key factors banks use to evaluate your creditworthiness.
1. Income And Employment History
Whether it is a personal or a business loan, lenders need to consider your income capacity or your cash flow. A large and steady flow of income serves as an assurance that you can actually pay the amount you are borrowing. It is assessed based on financial metrics, benchmark, and loan history. It also varies on the amount you are hoping to borrow. If it is a huge chunk of dollars, lenders would also want to see a higher income in your payslip.
Lenders also pay attention to your employment history. They need to see a steady employment history with years to back it up.
2. Debt Coverage
In financing, debt coverage is the ratio of your available cash flow to your debt obligations. Lenders need to measure your current debt and your capacity to pay for it on time. When calculated, they need to see a low debt-to-income ratio to make you eligible for financial help.
If you are applying for a business loan, banks would combine your business and personal debt coverage to compute for your ratio. They need to take into account your personal capacity to pay for the borrowed money if your business faces financial struggles in the future.
3. Credit Score
Almost all financing organizations calculate and look at an applicant’s credit score. A credit score is a numerical summarization of your credit files. By using a credit score model such as FICO Score and VantageScore, lenders come up with a numbered evaluation to predict an applicant’s capability to pay their due credit. The calculations are based on your payment and credit history, new credit, and amounts owed.
4. Collateral Value
Collateral is any assets used as a backup payment to the bank, in the event that a borrower fails to pay the financed money. Not all loans require collateral but those that do, are called secured loans. Hard assets such as real estate secure you an approved credit with a low-interest rate. The higher the value of your collateral, the more likely you are to get a loan with favorable interest rates.
Other assets such as business equipment, working capital, or your home, may be used as collateral.
5. Liquid Assets
Aside from down payment, banks like to know the number of current assets you have—assets that can be easily liquidated. These assets include cash and equivalents, short-term investments, inventory, and accounts receivable.
A large number of current assets reassure lenders of your ability to continue payments despite temporary financial problems such as job loss or business bankruptcy.
For business loans, economic conditions, and the nature of the business is an important aspect that lenders need to consider. Lenders will review the industry and condition of your business, its supplier and customer relationship, and competitive landscape to assess its eligibility for credit. Banks usually favor businesses with a booming industry and favorable conditions.
7. Loan Term
Lastly, lenders are biased to applicants that are applying for a short-term loan, as opposed to those with a 7 to 8-year plan. Financial situations can change drastically within a year and lenders do not want to gamble with that. Banks are more likely to approve a 2-year loan term coupled with a sizable down payment.
Your Daily Takeaway
These seven factors or conditions are essential when applying for a loan. If you’ve got a BIG plan brewing for the company, and you’re looking to get the new project funded by a bank or lending firm, you have to make sure that your books are updated at all times. If this is not your cup of tea, exactly, you can always get Annette & Co. to help you out!