5 Key Tests to Pass When Applying for a Loan
If you’re considering applying for a bank loan to fund the growth of your business, increase your chances of getting your loan application approved by being prepared. Banks present 5 key tests to their loan applicants. Passing these tests improves the likelihood of you being successful in your loan application. These tests are referred to as the 5 Cs by banks.
1. Character
Believe it or not, this is one of the most vital considerations for financiers. This is because the individual running the business is the one who will pay the loan.
Your personal integrity, reputation and willingness to repay the loan will be checked by the bank. To decide objectively, lenders also use financial statements.
Your character is judged by the bank by assessing your payment history with other existing or past loans. Whether you paid on time and your taxes are up to date are also checked by the bank.
Lenders also want to see how business owners have handled any past crises. They will check for a history of defaults, writs, judgments or bankruptcy.
2. Capacity
Banks will look at the ability of your business to repay the loan, because they, obviously, want to be repaid.
You will be required to submit copies of a budgeted profit and loss statement as well as a cash flow projection that spans the life of the loan.
For the two statements, remember to put the interest and repayments of the loan you’re applying for to prove that your cash flow is sufficient and you will remain profitable during the time frame of the loan.
3. Collateral
A fancy word for security, collateral is what banks will ask you to provide when you apply for a loan. The usual collateral for small business is the applicant’s home or business premises (if they own them).
The bank wants to make sure they can recoup the money they loan you if you happen to default on it. As an example, if you want to get a loan to run a café, it is not likely for the bank to accept your fit out and stock as collateral because the value of these assets will be insignificant if the business folds. This is the reason why you have to have sufficient security to cover the loan.
4. Capital
The bank will want to check your business’ financial status when you apply for a loan.
What they will check is the type and liquidity of your business’ assets and the type and nature of the business’ debts or liabilities. They would see you in a better light if you have capital that went into the business, so you and the bank are both at risk in the business.
5. Conditions
Lastly, the bank will try to find out if you and your business are capable of fulfilling all of the loan’s terms and conditions to make sure you won’t default on the loan. The proposed repayment schedule will be checked against your expected cash flow and your capability to fulfill all the requirements of the loan.
The requirements may consist of submitting quarterly financial statements, keeping certain financial percentages, and presenting proof of insurance. The insurance type may vary and may include key-man insurance in the event the business owner dies or becomes disabled.
Be prepared – this is the key to a successful loan application. Ensure that you and your business can pass these tests and you are sure to get that loan.
By presenting you with the tests that are required when you apply for a loan, we hope to help you succeed in your loan application. If you would like to seek our advice about loans for your business, or if you have any enquiries about our portfolio of chartered accounting and business services, please contact PJS Accountants.
