While I handle about 30 inquiries from prospective business borrowers on a monthly basis, I have only managed to lend to 6 customers in the last one year.
So, why the high decline rate?
In this article, I will examine the broad areas your loan application must address in order to be viable. The four key things include; repayment ability, purpose for borrowing, collateral offered and structure of the borrowing.
When it comes to lending, ability to pay is king.
The lender looks at how long you have been in business as an indicator of stability and understanding of the industry dynamics. Start ups don’t survive past initial scrutiny. Long term loans are repaid from profits which means the borrowing business has to show consistent profitability. Depending on the loan amount, the lender may ask for financial statements for 2 to 5 years. However, figures given are heavily discounted.
Bank account statements usually carry more weight as they are hard to manipulate.
As a rule of thumb, at least 80% of your sales should be reflected on the Bank account statement. If you present financial statements showing figures way beyond the account turnover, the assumption is they have been exaggerated. On the contrary, many business people understate their profits in order to minimize tax liability. The lender will then wonder why you are banking more than your sales. Could you be doing some illegal business on the side?
Simple as it looks, loans get declined because of the reasons advanced for borrowing.
This information is sought first of all to confirm that the purpose of borrowing is legal. Secondly, the need to borrow helps the lender determine which product type to give and the repayment period to grant.
Lenders lose money everyday due to loans going bad. Businesses collapse every now and then rendering them unable to meet loan repayments. The collateral offered is the lender’s fall back and should be adequate to cover the loan given should default occur.
Loan structure refers to matching the need to the period of loan repayment. For example, a supplier who needs money to service a specific tender does not need a loan spread over 5 years! Again, a borrower looking for money to construct their family home run into problems if the loan is to be repaid in 6 months time because technically, the home is not a business investment and so repayment should be spread over a longer period to avoid eating into their working capital.
Typically, this information should come out clearly in the application letter. It will later be corroborated by visits and interviews with the customer.