Financial intermediation is one of the primary roles of banks and non-bank financial institutions. They are in business to accept deposits and lend it out to businesses and individuals who need it for legitimate purposes – making profit to sustain their business in the process. So we know that denying loan request isn’t really what they are all about.
Banks receive hundreds of loan requests each time. They have instituted very rigorous credit approval systems that carefully ends up selecting only loans that they are comfortable with and are sure of getting paid back – seemingly so at the time of approval. So what gets some loan requests the approval stump and others denied.
I have worked in the credit department of two banks in Ghana for seven years. Part of my job is scrutinizing and analyzing hundreds of loan applications – large and small – throughout my seven year experience, approving some of the loan requests and denying others. Here are some guidelines for you to get quick approval for your loan request.
Cashflow Speaks Volumes
Your business, project or whatever you intend to use the money for must be able to generate enough money so you can repay the loan. This is very important requirement that lending institutions look out for. Your financial statements (previous performance, if there are any) and projections should be assuring enough that you will be able to repay the loan and accompanying interest. Loan repayments are structured in line with your cashflow pattern.
People usually apply for loans for their businesses without including their financial statements. How would the bank assess your ability to pay the amount you have requested for? Showing your bank accounts is not enough. This is because your bank account does not show how much you earn as a business. It shows the flow of funds through your account. You need proper financial statements and projections or budget to prove that your business will return the money.
Managerial Competence
The people behind the business are the ones who decide what to do with the loan, once it is disbursed. It is important that you prove to the bank that the management of the business knows how to prudently apply the loan to its purpose and importantly, manage all activities effectively to generate the needed returns necessarily to repay the loan.
Your loan application will be considered for approval when the lending institution is comfortable that the loan is going into competent and safe hands. Small businesses are usually owner-managed, and the owner’s managerial ability (knowledge, skill and experience) in that line of business is assessed. It is important that you prove that you are capable of managing the business effectively, by adding a professional profile.
Character is important
In addition to management’s competence to manage the business or activity for which loan is requested, is character. In practice, Character refers to your credit history, and how you or your business has also always performed in regards to previous loans taken and other financial obligations. Repayment of previous loans is not enough. Paying them on time, that is, when the payment obligations were due is what matters. Have you always paid your personal bills on time? Can you prove this to the bank? Do you have credible references? If you have had a loan or supplier credit before, did you always pay on time? Answers to questions such as these will paint a picture of your character to the bank. For start-ups who do not have such information, other factors will be considered.
Adequately Capitalized
The size of the amount with which you start business and how much it has grown to is equally important to the bank. Having enough reserves to handle unforeseen shocks to the business puts your application ahead of other applications. Small capital could mean smaller loans – though not always true. Also, you should be able to show how you plan to inject or raise extra capital when the need be.
Conditions must be favourable
Conditions in your operating environment and specific industry are carefully analyzed. Some banks have policies that limit them from exposing themselves to certain industries and businesses. It is important you find out from your loan officer before submitting your application to avoid long periods of back and forth with your application. Having unique products and sometimes strategies that sets you apart from the competition makes your application approvable.
Collateral is not Everything
Though it appears like it’s the most important, collateral is actually not a major consideration during the analysis of your loan application. Banks do not lend so they can go round selling the collaterals pledged against the loan. That’s simply not their business. Collateral is only a fall-back option. You still have to provide this in most cases to put your request in a good position for approval. Liquid assets assigned to the bank or immovable assets free of lien and litigation are preferred.