Increasing One's Chances Of Obtaining A Bank Loan: Business Financing Essay

Length: 4 pages Sources: 3 Subject: Economics Type: Essay Paper: #35185535 Related Topics: Debt Financing, Financing, Business Intelligence, Bank
Excerpt from Essay :

Business Financing: Increasing One's Chances of Obtaining a Bank Loan

Applying for a loan in a bank or any financial institution with lending capabilities can be frustrating, especially if the applicant does not know exactly what they are supposed to do to win the loan officer's confidence. Banks have an obligation to protect the funds and assets that clients have entrusted to them; as such, they often are very conservative. At the same time, they also are in business, out to make profit by recouping the principal of loans that they extend to borrowers, obtaining a profitable rate of return on the same, and ensuring that borrowers prosper and increase their deposits with them. In the final analysis, this only shows that it is the borrower's responsibility, therefore, to develop and maintain positive relations with the bank, and provide sufficient reason for the bank to feel safe entrusting their capital to them. This text is, in basic terms, a guide to business owners as to what exactly needs to be done to get bankers to tick. It outlines the various factors that bankers consider before approving or rejecting a loan application, and the fundamental measures that borrowers could take to get their loan applications approved.

Factors Considered During a Loan Application

Regardless of the type of loan being applied for, bankers will often consider the following four factors in determining whether or not to give approval:

Credit History: loan officers will often review a borrower's personal credit history as well as that of their business (if it is not a start-up) to determine their degree of creditworthiness (Abraham & Zhang, 2008). For a business that has been in existence, lenders will often consider a business creditworthy if it has at least five trade experiences. Towards this end, business persons who have been running their business with personal assets alone and no credit could boost the chances of their entities being considered creditworthy by making a number of trade credit purchases before making their loan application. The applicant's personal credit history can be obtained from consumer credit reporting agencies; it is an outward representation of an individual's character in terms of honoring their debts (Abraham & Zhang, 2008).

Availability of Collateral: collateral is some kind of...

...

Collateral is one of the crucial requirements for obtaining credit, and is meant to minimize the risk associated with extending the same. Collateral will often be required to match the loan being extended, and its useful life has to either meet or exceed the term of the loan. Most lenders will require that in addition to the above conditions, property put forth as collateral not have any prior or superior liens. This is their way of ensuring that that they have a priority claim over the property in case of default.

The Business' History of Cash Flows: a lender will often review a business' cash-flow cycle -- the average period between the time inventory is purchased and when it is sold, or when account receivables are collected - to determine whether the business' daily operations are capable of supporting the loan being sought; that is, whether enough money is being generated on a daily basis to help repay the loan. Besides money generated from sales less everyday expenses, a business' cash flows will also include proceeds from financial or investment activities such as leases, purchase of machinery, insurance, contracts, and so on. A business will be deemed creditworthy if its ongoing collections and sales represent a regular and sufficient stream of cash (Abraham & Zhang, 2008).

In this regard, a business owner can boost their chances of obtaining credit by improving their cash flow position through delaying their debt payments, collecting receivables as soon as possible, accelerating cash receipts and reducing credit allowances, or reviewing relevant tax strategies; for instance, availing accelerated depreciation to increase the business' short-term deductions (Abraham & Zhang, 2008).

The Debt-Net worth Ratio: this ration measures the degree to which a business is supported by debt. A high debt-net worth ratio…

Sources Used in Documents:

References

Abrahams, C.R. & Zhang, M. (2008). Fair-Lending Compliance: Intelligence and Implications for Credit Risk Management. Hoboken, NJ: John Wiley & Sons

Bangs, D. (2010). Getting a Loan. Entrepreneur Media Inc. Retrieved 19 February 2015 from http://www.entrepreneur.com/article/241831

Bartram, P. (2014). When the Bank Says No. Director Publications. Retrieved 20 February 2015 from http://www.director.co.uk/magazine/2009/8%20September/finance_when_bank_says_no_63_01.html


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