If you were to lend money to someone on personal front, the repayment would be the foremost factor that would get considered. This would be despite you having to know the borrower personally and being aware of his background both financial and personal in detail. Similarly, the bank or any other lending institution is going to evaluate any borrowers’ request against the repayment capacity. Or, put in other words, the possibility of default happening on the loan.
It becomes easier for the lending institution to evaluate a loan application for those who have a credit history. Especially when one is applying for a loan to start a business.
Following are the factors that the banks may consider while evaluating the loan application.
Collateral
Since the loan is being given to start a new business which may or may not be successful in short to long term. The success or failure apart from the market for product, the product quality, plan; is largely and more importantly dependent upon the execution and perseverance from the promoters in individual capacity. The bank will not be able to gauge the individual capability to run the show and would want to secure the loan with a collateral. Generally property makes the best collateral in these cases. It is not important to have the collateral in the name of company, even the directors or promoters can pledge their property to secure a loan. The other options of collateral are securities or cash deposit.
Business plan
This is an important factor. The business has to be viable and must have the probability to grow. It has to be a thought out plan. What are the market conditions, the demand, the competition, difference between the features and value on existing product as against the one offered by the borrower, how is the plan going to get implemented, the team available for execution etc are just a few parameters that would make part of the business plan. Other than these the math around the pricing, procurement of raw material, all associated costs and the time it would take to actually start making some profit will also be evaluated by the lender. Drawing out a thought through business plan becomes essential for any new business to be in a position to even get evaluated for a loan.
Credit Profile
The directors’ good credit profile will help in the cause. A clean record on past credit products will only aid the confidence of the underwriting team. Therefore, it is advised to obtain the free credit report and check out the details before approaching the bank with a plan.
Deployment of business proceeds
There has to be a clear plan on how the funds received from the bank will get consumed and utilized. The loan proceeds should be able to facilitate smooth roll out of the business and must aid it gaining steam over a short term. Unclear idea on what all will the loan amount be used against is only going to lead to rejection.
Your financial details
The personal financial details of the promoters or directors are quite important. A stable financial profile of the individuals behind the new business supports the cause of gaining the loan. Thus a last few years’ of documented earning, bank statements etc would be needed from the individuals. The financial details also include the credit profile as was mentioned earlier in the post. In case there has been a default in past, then it may become a deterrent to the cause and one may be required to look out for a loan with bad CIBIL score as against a loan for a start up.
