One of the joys and realities of being in business is the prospect of needing money, either in your start-up or during growth or expansion. With a pragmatic understanding of the dynamics of the loan approval process, you can greatly enhance your prospects of success.
Once you start negotiating with the financial institution, you must sell the lender on the merits of your business financing request. However, as in all sales presentations, consider the needs and expectations of the other party – in this case, the loans officer. A loans officer will be interested in the following:
Your familiarity with the business concept and the realities of the marketplace, as reflected in your business plan.
Your ability to service and pay back the debt with sufficient surplus to cover contingencies, including interest charges, so that you eventually repay the debt in full. This would be demonstrated in your cash flow forecast and projected income statements.
Your ability to provide security to the bank for the loan.
Your level of commitment, as shown by your equity in the business or cash investment in the particular asset being purchased.
Your secondary source of repayment, including security in the event of default or other problem, and other sources of income.
Your reasons why the money is needed and how long you need it for, and how much you need.
Your track record and integrity, as shown in your personal credit history, your business plan, and business results or past business experience.
Your businesslike approach. Remember, a lender is in business for the same reason you are – to make a profit, and to minimize or eliminate bad debts. They are not venture capitalists.
Your judgement in supplying information. Be sensible with the number of documents you provide at the outset. You do not want to overwhelm the loans officer with material.
Your personal appearance. You should present yourself in a manner that projects self-confidence and success.
Your consideration in allowing sufficient lead time for approval. The lender needs a reasonable time to assess your proposal. Also, the loan may have to be reviewed at another level within the financial institution.
Your credit rating. It’s a good idea to review your credit rating periodically, as there may be errors or blemishes to correct in your file. Note your positive and negative points, so you can discuss these when raised by the lender.
If your request for financing is approved, make sure you understand and can live with the conditions before you commit to them. Depending on the amount of money involved, you may wish to ask your accountant and lawyer to assist you in the loan application in advance and to review the bank’s approval. Remember that it is a highly competitive lending market place, so consider at least three comparative quotes.
If your request for financing is not approved, find out why. Use the lender’s experience to your advantage. Lenders handle many requests for financing, and have experience in the financial aspect of many businesses, even if they do not have personal business management experience. If there is something wrong with your financial proposal, see if it can be corrected and then reapply. Otherwise, use this knowledge when approaching other potential lenders, or on future occasions when seeking funds.
Some of the reasons for a loan rejection include: being outside bank policy, business idea considered risky or unsound, insufficient collateral, perceived lack of financial commitment, poor business plan or purpose of loan not explained or unacceptable.
Now that you know the factors that lenders take into account when considering a loan application, evaluate your situation based on those criteria. Adopt a positive, self-confident and selective approach. Remember, you are doing the lender a favour by agreeing to give them your business, not the other way around.