10 Criteria for Bank Business Loan _ Banks require more than just collateral from you before they can give you a loan for your business. They may need more data to determine their credit scores and keep track of their money.
It needn’t come as a surprise, though, considering that the money at stake could run into hundreds of thousands. Proper documentation would be in order. Even so, some of the requirements may give some people looking to take a business loan a squirm. Is it merely about not being remiss about the transactions or is there more to it than meets the eye?
For a start, giving out loans to individuals who do not intend to invest the money and expect profits is a different thing from lending to banks. Here is why?
Maybe it is just bank ethics (a common one for all of them at that), but the primary aim of any regular bank is to avoid running a deficit. Nothing creates such a gap as attempting to fund a start-up, considering that the money is sourced from everyday bank customers.
To make the picture clear, some financial unicorns like Y Combinator and Palantir (for select companies) look to upscale start-ups and set them on a blazing career path. However, this isn’t the case for the typical commercial bank down the street because of obvious differences. The business purpose contrast sharply.
As it happens, you might have to get 10 Criteria for Bank Business Loan, including at least one collateral, to access a bank loan.
Is it such a dreadful task? No, it isn’t. See the sections below for a step-by-step breakdown of the entire process and how it works.
Complete Business History: 10 Criteria for Bank Business Loan
The first thing on our table is Complete Business History, which factors into the credit scoring process, especially for loans that might run into months.
Why is it such a fuss?
The reason is not far-fetched; abridged business history could be a deal breaker while trying to get a loan. Commercial banks won’t balk at requesting every bit of the borrowers’ business history, which comprises relationships with banks as well.
Running businesses on competitive terms or accumulating a near-full score rating doesn’t translate to 100% good banking cred. Some companies of good repute may have an undesirable snag due to fallouts with their banks.
If you need a loan, the first of the 10 Criteria for a Bank Business Loan you need to consider is that you have a good business history. Also, lacing an unfavorable part of crucial business documents with vagueness will be an easy way to lose the loan. Our advice is, don’t even try it at all.
Here is how to get over this part:
- Ensure you keep a straight record;
- Do not try to abridge the receipts (or other documents) that may be required;
- Further, ensure that you don’t have any tax issues.
Please note that presenting a reliable business record is the best way to approach commercial banks for loans. It helps the lender to reduce any chances of mutual distrust between the two parties involved, eliminating incidences of chaotic deals with the borrower.
The next point in our 10 Criteria for Bank Business Loan list is closely related to this one, but there are a few differences. See below for details.
2. Financial Audit
As in the Complete Business History part, the Financial Audit must not be an abridged copy. In fact, there needn’t be any trace of tampering with the audit as It could be the single criteria that sever the loan deal/process.
Here are the things you need to look out for while preparing the audit.
- Consider employing professional auditors as it would rend credence to your request.
- Ensure that your audit records the three financial years prior to the loan request, at least.
- Also, your balance sheet ought to reflect the available assets and capital, along with any debts (or possible liabilities in kind).
N/B: Where a commercial bank prefers collaterals to financial statements, it typically allows some oversights on the auditing part. Regardless, you can’t be too meticulous with the information you provide for a loan, especially if you need it urgently.
3. Full Detail of Trade Creditors/Trades Payable
Since the essence of the whole 10 Criteria for a Bank Business Loan is to determine the credibility of the company seeking the loan, the commercial bank providing the money may need to check for goings-on like the details of receipts or trade creditors.
The creditors’ detail provides a veneer of insurance on the bare minimum because it factors into the credit scoring process.
4. Insurance Document
Insurance is the best hedge against force majeure, standing out among the 10 Criteria for Bank Business Loan list.
Also, it goes from mere property to human agency in the day-to-day running of the company. You will have to insure against imminent occurrences like sudden deaths, particularly for keystone members of your business.
5. Draft Out Future Ratios
Here is a technical bit of the whole lending business.
A commercial bank giving out a loan to a company (or other specified business) will usually allow a log area for all the financial fluctuations the company would encounter during the specified loan period. The extent of variation tethers to a debt ratio, beyond which the company is incapable of paying the loan ordinarily.
Depending on the bank, such debts may bear discrete ratios to current equity. Regardless of the instruments in practice, the intent is always the same. Future ratios are a way of checking the lifeline of the loan.
In all cases, it is one of the 10 Criteria for a Bank Business Loan that a company (or any other business) will need to consider before taking out a loan.
6. 10 Criteria for Bank Business Loan: Collateral
It goes without saying that one requires collateral to get a loan. Although some fin-techs would lend (typically small amounts) to individuals without requiring cumbersome forfeitures, the case for commercial banks and companies is quite different.
Also, the collaterals pledged for loans are mostly preferred as landed property or any other sizeable asset in the company’s possession. If the collateral depends on remittances, the bank will set a hardliner on the ease of converting the asset to cash, regardless of whether the other items in the 10 Criteria for Bank Business Loan list are available.
Banks accept a broad range of collateral depending on the jurisdiction in which it functions.
8. Details of Personal Finance
In addition to collaterals, banks may need props from the company founders, especially if the loan depends on some collaterals taken from the founders’ personal finances or property.
Some documents that may be necessary at this stage include an investment portfolio, mortgage, real estate, etc., including written financial reviews of top stakeholders in the start-up that is requesting the loan.
The purpose is to create enough hedge against dodgy credit scores and ensure that the loan is reasonably safe.
8. Tax Returns
To avoid paying debts in the borrowers’ backlog, commercial banks will require the company tax history.
Also, it easily helps them to know which loan requests are genuinely needed for investments since a company verging on bankruptcy will not meet up with tax payments. Disregarding the impact of tax returns on loan requests will affect the repayment negatively. No commercial bank needs that.
9. Full Detail of Trade or Trades Receivable
To keep a balanced transaction sheet, the details of Trades Receivable are also required in order to secure a commercial bank business loan.
It goes along with the Creditor’s details, ensuring that the company isn’t running any deficits.
10. Draft of Business Plan
Some commercial banks will not require this criterion, although enclosing a draft in the documents isn’t out of the question.
If the company seeking the loan is a start-up with less than five (5) years of business history, it might need to provide a relatively more detailed business plan than an older company might need.
A typical business plan shows the team structures, functions, and possible earmarks that play important roles in the company.