Many people frequently seek out loans from banks. In seeking out and attempting to obtain a loan, however, there are significant advantages even if the loan itself is not granted.
Banks require several factors from businesses and individuals to grant them loans. Primarily, we must remember that a bank is, by definition, conservative with its money. Banks want to minimise risk-taking. Therefore, it is up to you as a business or individual to make banks feel safe. However, there are advantages in merely taking steps to be more secure, even if the loan is eventually not granted.
Banks assess you for loans in different ways, but there are universal factors you should prepare for.
Firstly, you should have a loan or financing proposal, which sets out what’s needed and why, the beginning and duration, and your repayment plan.
Secondly, documentation with current and up-to-date balance sheets, projected income statements and so on, are essential.
These two steps alone are important in aiding businesses with knowledge of their current financial situation. With such knowledge, businesses can better plan: making smarter choices and using their actual resources. Mistakes often occur because we think we have resources we do not.
Taking these steps helps confirm resources’ existence or, indeed, their non-existence making us better at managing ourselves.
What banks look for
The financial writer David Bangs has six C’s of credit which he says banks look for, when dealing with credit: Character, Capacity, Conditions, Collateral, Credibility, and a Contingency Plan.
What’s important, aside from their direct influence on obtaining a loan is that they’re beneficial to businesses regardless.
Character is essential, if not the most important asset, to small businesses, since such loans are personal loans. Banks want to know your successful credit history, past performances, and so on. Presenting your character in a good light, however, is beneficial regardless. Better character means better business.
Capacity answers how much support you can give your debt load. Since debt/net worth ratio becomes the justifications for a loan, a high debt/net is viewed less favourably. Cleaning this up means, generally, less financial hassle regardless of a successful loan application.
The current financial climate’s conditions naturally dictate how much and how many loans are given out. You could meet all other criteria, but be applying in the wrong climate. Knowing the markets means you are operating under better informed conditions. All businesses should know the current state of the market anyway, in order to navigate themselves out of potentially troublesome waters.
Banks want to know that, should anything happen, you have collateral to compensate. They do benefit from having you progress, so that later, possibly, you will use them again: but in case the unfortunate arises, collateral is essential. Having money to fall back on, however, is always important whether as a business or individual.
How credible you are matters: fluffy business ideas that exist only in your head won’t convince anyone to work with you. But having reasonable goals, grounded in evidence, will mean everyone including the bank – will be convinced. Notice this convinces not only banks, but investors, clients and so on. Thus, being credible matters for your business’s success overall.
Finally, a contingency plan is a combination of showing credibility and having collateral. This shows what you will do in the worst-case scenario. Banks feel safe when, after engaging with the worst case scenario, they still benefit and you can explain why.
Businesses can act poorly if catastrophe strikes. Preparing for such a scenario, therefore, matters a great deal anyway.
All these points show, then, that not only should you have these just to obtain a loan, but to benefit your business overall.