Criteria For Securing Bank Loan
Before You Can Secure Bank Loan, You Must Meet The Following Criteria.
Getting loan from the bank is not easy to get by especially for a new entrepreneur. Nevertheless, this is not to say that banks don’t give loan to young entrepreneurs. If you satisfy their conditions, they will definitely grant you loan for your business.
Banks are willing to grant loan as long as they are sure of getting back their funds including the interest thereon because that is the only way they can remain in business too. Knowing what the banks are looking for before they can grant you loans will help you prepare adequately when approaching them for credit facilities. In most cases, banks usually require that you personally invest between 20 – 30% of the amount you request. When banks review your loan application, there are 5 C’s they expect you to satisfy before your application for the bank loan can be considered and these are outlined below:
Character
Determining your character is somehow subjective. Banks want to be satisfied of your trustworthiness to repay the loan. There are certain people that you cannot trust when it comes to money. Bank will like to investigate your banking history, your educational background and your experience in your line of business. The bank may not have sufficient information about your character but if you have good references, your loan application may be considered.
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Collateral
Before any bank can give you loan to finance a start up company, they will require assets which will serve as collateral in case of default. Instead of selling off your assets in order to raise funds to finance your business, the assets can be used as collateral for securing bank loan. By this, you can still regain your assets after you must have paid off the loan. When it comes to granting loan, banks will like to ensure that they will be able to get back their fund. Therefore, the amount any bank will grant you as loan may be restricted to the value of the assets you are able to surrender as collateral. Meanwhile, you cannot determine the value of your assets. Banks will determine the value they will place on your assets and when it comes to valuation of assets, banks are very conservative. Examples of assets you can use as collateral include equipment, landed property, buildings, investment in shares etc. Banks will always want the loan term to match with the life span of whatever assets you offer as collateral. If you want a three year loan term, bank will only accept assets that can still worth the amount of the loan in a three years term.
Condition
Banks want to know the intended purpose of the loan. What do you want to use the money for? The intended purpose should match your business plan. If your reason for seeking for a loan contradicts your business plan, this alone may disqualify you. Banks will also consider both internal and external factors which might affect your business such as general economic condition, your competitors, trend of similar businesses and your customer base.
Capital
How much capital have you invested in the business? What are the sources of such capital? Having personal money invested in the business give banks more confidence in your business. If all the funds invested are from other people without your own contribution, banks may be unwilling to lend you money. They usually look at debt-equity ratio to determine the proportion of debts to your own capital contribution. Getting additional loan to finance a business that is already having a high debt profile may be too risky for banks to finance.
Capacity
This is your ability to honour the interest and principal repayment as at when due. The bank will look at your cash flow, timing of the repayment. If your cash flow projection indicates that you may not be able to pay, the bank may reduce the amount of loan to a level which your cash flow will be able to support. They may also look at other possible sources of repayment. Showing the banks that you have other sources of income from where you can make repayment in case of unpredicted cash flow crisis will increase your chance of getting the loan.
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Bank loan can be offered for a period of five years but you are required to pay the interest and principal as at when due in compliance with the loan agreement. Since bank loan covers a medium or long term period, this fund can be used for the acquisition of fixed assets. It is not proper to take out a loan to cater for overheads because it will be difficult to keep up with the repayment when due.