Business Loan Application Assessment

Applying for a business loan can be a nervous experience as you put forward your proposal in the hope of a big tick and capital you need to take your product to the market. A little inside knowledge might help ease some of those nerves and get the finance you need...

Although procedures vary from bank to bank, branch managers of banks are generally given limited authority, if any, to approve certain types of advances at their discretion. If larger amounts or advances of a type outside their delegated authority are involved, the applications are referred to regional or state managers for approval. Regional or state managers keep branch managers informed of a banks general policy concerning the type and extent of advances to be made. In a growing number of cases, business loans are handled at regional centers where a wider range of loan assessment skills can be made available.

In considering a loan application from a business, a bank first looks at the character, integrity, efficiency and technical and financial ability of the principals. Favorable personal characteristics will certainly stand borrowers in good stead in the eyes of a bank considering a loan application. A bank also takes into account the purpose for which a loan is wanted. Banks are constantly receiving many sound applications and are desirous of assisting worthwhile business operations.

While banks have the capacity to lend more freely, a bank's risk assessment will affect the interest rate that may be applied. Certainly, if a business proposition does not show sound judgment or if it is speculative or legally doubtful, a bank is unlikely to view it favorably.

The most important single factor in a bank's assessment of a loan application is the borrower's capacity to service the debt. A bank seeks a clear picture of how and when repayments, including in interest charges, are to be made. A loan is not normally granted if the financial position of the business shows that the debt will be too much of a burden for it.

Accordingly, a bank will want to examine in detail the balance sheets and trading results of the business over at least three years in order to gauge its prospects. Existing liabilities and commitments and levels of profitability are carefully looked at. Banks expect the owners to have a substantial equity in their business and are wary of any signs of under-capitalization business has nothing to fear, and everything to gain, by giving the bank approached all available relevant information.

It is in the interest of both bank and borrower that a bar. arrangement goes smoothly with the business being able to meet its obligations under a loan as they become due. Accordingly, all loans granted by banks are subject to annual or other periodic reviews as agreed with the borrowers when the loans are granted.

Generally, the careful initial assessments made by banks and these periodic reviews ensure that loans are made and continue on sound bases. Faithful observation of the agreed loan arrangement is to a borrower's advantage, as it establishes a sound reputation as a good customer. This can be important if further borrowing is sought at a later stage.

The last thing banks want is to have to realize on a security obtained for a loan. However, because conditions may change over the period of a loan, it is necessary for banks to obtain adequate security backing. This is usually a mortgage over land and buildings but may include charge over plan, shares or other securities or fixed deposits.

Originally submitted by: Sam Shaw