The 5 C’s Of Your Loan Application

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Lenders tend to be very secretive when it comes to choosing who they lend their cash too.

Each seem to have their own formula.

Just because you have been approved for a loan by one lender does not necessarily mean that you will be approved for a loan through another lender.

That being said, there are five things which most banks will pay attention to during the application process, and those five elements are going to be detailed on this page.

The traits that are discussed on this page may have a slightly variance from lender to lender.

For example, one company may be a little bit more relaxed when it comes to offering a loan.

But, you always need to ensure that you are the strongest prospect possible.

This is the only way in which you can boost your chances of a fast and easy loan application.

As you can see from this graph, (Source: Federal Bank of New York), sooner or later, a small business is likely to need financing.

Looking below, you can see the percentage of small businesses that apply for business loans, and the amounts they are seeking.

Even if you do not need it now, it is worth knowing the rules, just to increase your chances of success in the future.

Ventury- The 5 C's Of Your Loan Application

What are the chances that you will be approved for a small business loan?

There are some different factors which need to be considered when it comes to analyzing your chances of being approved for a small business loan.

The most important of those will be covered in a short while.

For now, though, it is worth highlighting a Huffington Post article written by a CEO at a top lending company.

They established that four of the most important ‘points’ are:

–    The length of time a company has been in business. Obviously, the longer you have been around, the higher your chances are of being approved for a loan.

–    Revenue

–    Personal credit score. Many companies will look at the person applying for the loan, not just the business.

–    Existing debt

Business News Daily takes another viewpoint and looks at things which will drastically reduce your chances of being approved for a small business loan. These include:

–    Past Bankruptcy

–    Lack of plans for your business or no vision of what you are going to do with the money.

–    An inability to be able to repay the loan on a monthly basis.

As you can see from this chart, banks are becoming less reluctant to lend out money on a whim:

Ventury- The 5 C's Of Your Loan Application 2

Steps you can take to improve your chances of receiving a loan

The U.S. Small Business Administration goes into a great deal more depth than this section, so it is worth checking that out if you are looking for a loan.

It can be summed up as the following:

–    Understanding the criteria a lender uses for loans

–    Knowing the documentation you need to supply

–    Preparing to answer the questions that the bank will ask

–    Know the amount of money that you are going to be borrowing and what will be done with it.

–    Where should you look for funding? For example, most banks are not going to offer funds to a start-up company due to the inherent risk. Start-ups will have to take another route.

–    Search for associations in the immediate area who can help you with the loan application process. For instance, there is an SBA office in every state.

Collateral

Collateral is incredibly important when it comes to securing a business loan, particularly if you have a poor credit score.

The purpose of collateral is to provide the lender with a ‘guarantee’ that you will be able to pay the loan back.

If you are unable to do so, your collateral will be seized.

Many lenders will ask for a personal guarantee, even if your company has limited liability.

This means that you will be personally responsible for paying back the loan, even if your business can’t do so.

The collateral that is put up will be dependent on the type of business that needs an investment, and the amount of money that needs to be borrowed.

 

Ventury- The 5 C's Of Your Loan Application (1st image)

Capital

The lender will not lend you all of the money that you need for your business.

That is far too risky for them.

After all, what is your incentive to if you are not investing your own cash?

This is why many lenders will look at how much you are personally investing in the business.

 A significant amount being spent on your part will demonstrate that you have a drive to succeed.

It also reduces the amount of risk on the ‘lender’s head’.

There is no ‘hard and fast’ rule as to the percentage of the capital that you will need to put up.

This will all be determined on a case by case basis.

For example, the lender will probably not be that worried if you are only putting up a small amount of cash, providing your business has a reasonable chance of being successful!  

 

Capacity

Do you have the ability to pay back your loan?

You are going to need to provide evidence of stable cash flow into your business.

If you have a positive cash flow each month, and that positive cash flow looks stable enough to cover the amount of money that you are seeking to borrow, then your chances of receiving the cash are far higher.

 

Ventury- The 5 C's Of Your Loan Application (2nd image)

The lender may also wish to look at any financial projections for the future, providing you can back them up with data.

For example, you may want to highlight big contracts that you are looking to obtain, or maybe details of new products or services that you are seeking to introduce which may have an enormous impact on your overall cash flow.

In addition to this, a lender will wish to look into any borrowing issues you may have had in the past.

If you have failed to pay back loans in the past, or if you have made some late payments on credit agreements, then the chances of you being approved for a new loan are minimal at the very best.

 

Conditions

The lender will wish to know what you are spending the loan on.

If you are not using it to increase the value of your business, then the chances of them lending you the cash will be minimal.

For example, it is unlikely that you will be loaned money to cover any other debts your company has, including wages.

They will want to see that you have planned to use the money and what it is being spent.

They need you to demonstrate how likely it is that the value of your company will increase due to this injection of cash.

In addition to this, they will want to look at elements which may be unique to your company.

Such as, whether the products that you are looking to offer fit the brand that your business has established.

They will also wish to look at local market conditions as well as any competition out there in the market.

If you can prove that somebody else has done well using the business model that you are proposing, you will find that the chances of you obtaining the loan that you want will increase drastically.

To cap it off, the lender will wish to see that you have an element of risk planning in place.

They need you to demonstrate that you still have the capability to pay the loan back, even if the worst should happen.

 

Character

Finally, the lender will want to look at your businesses’ character.

They want to know how long you have been in business; they want to know the success that you have, they want to know how much experience that you have in your area.

They may even wish to look at social media to see how your potential customers see you.

In fact, it is not uncommon for lenders to use websites such as Yelp to get an indication as to the reputation of your company.

Just to demonstrate the importance of the size of your business, you should look at this chart.

It shows that microloans have fallen in recent years.

On the other hand, the amount of money being offered to large companies has risen.

This demonstrates that lenders are looking for areas where they have a good chance of making back their money:

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The Loan Application

When you apply for a loan, it is important that you bear everything mentioned here in mind.

You will need to provide supporting documents which demonstrate that you do know what you are doing when it comes to running a business.

Lenders have been known to invest in ventures which are inherently risky, all because the applicant seems to have everything in order, and appears to know what they know what they are doing.

 These are the type of people that companies wish to lend to.