In this article, I am going to explain on how loans are being approved by commercial banks and other national lending institutions. Borrowers who are not familiar with the required financial documentation should employ the service of well known Financial Consultants, as Lenders wants to have detailed information of your financial request either for your business or personal purpose.
Loan approval depend mainly on some of the following factors:
1) The Debt Servicing Factor/Financial Strength
2) Collaterals
3) Credit History
4) Management background
In this articles, I am going to emphasize on the “Debt Serving Factor/Financial Strength”
The Debt Servicing/Financial Strength, is the Borrower ability to pay off the requested loan either for his business or personal purpose. As the Lender who had not known you before and you have not had any financial dealing with him want to be sure that you are a credible applicant who could be able to pay off the loan with the agreed interest and within the stipulated time frame. Some Lenders do not give out loans to those who could not pay.
He wants to know your monthly sources of income. Do you have an existing business that brings enough profit to enable you pay off the loan? . Loan request for personal needs could be approved based on your personal income taking into account your personal job’s salary level if you are employed and other source of income.
In case, the loan you are requesting is for business purpose, your are to present to the Lender the company’s audited Balance Sheet and the Profit and loss Statement at least for the past three years. In the Balance Sheet, the Lender wants to know the assets and the liability of the company (if the loan is for business expansion)
. The assets is what the company owns; there are fixed assets(such as buildings, industrial equipment/machineries, etc which the company used as the vital assets in running the business) and liquid assets; this including cash at hand and in the bank and money owned by others dealing with the company either for the purchases of their goods or services which the company gives as credit to her reliable customers and others.
Also from the Balance Sheet, the Lender want to know the liability of the company; the liability is the debts the company owes; this include loans, leased property used by the company which the company is unable to pay for a long period of time. All this are some of the company’s liabilities which the Lenders want to know as well.
The Lender will evaluate the company assets and liabilities to ensure that the company assets in terms of monetary value, is higher than the liabilities; and estimated ratio is given to determine the assets over liability e.g. 3:1, 2:1 etc but where the liability is higher than the assets then the loans request may be rejected. In this case, the Borrower may approach another source of lenders known as the “Venture Capitalist” who participate in such high risk loans with higher interest rate in return.
The Profit and loss Statement is to determine how much profit the company is making and how much losses she incurs for the year. The Lender wants to know how much profit the company is making and the losses she incurs within the financial year. Therefore, the Lender would love to see the company’s three years Profit and Loss Statement in order to determine her current financial status in terms of net profit.
The same is also applicable to personal loans and credit cards applications. The Lender will require your Current Financial Statement including your background information. The lender will issue you forms for you to fill in which will reveal all your monthly income and expenses. He wants to see that your income for the month is more than your expenses with a determine ratio e.g. 3:1, 2:1 etc and the differences between your income and expenses is called the “Net Worth” while in the Profit and Loss Statement of a business, is called the “Net Profit” Therefore, Credit Cards issue are of different grades depending on your financial status. But where your monthly expenses is more than your your income, your loan may not be approved although could be approved by other lenders charging a higher interest rate.
The form will include your history and background, education, employment history, credit history, marital status etc.
Cash Flow Projection
Still on the Debt Servicing Factor, is the cash flow Projection Statement. This information is required of all type of business and investment loans including the start-up of new business and for expansion of an existing business.
The Cash Flow Projection Statement is the projected Profit and Loss Statement of the new or existing Business being prepared by experts showing the Lender how the loan amount could be spent in the business and how much net profit the company is going to make and will also include a detailed breakdown on how the loan amount could be paid off from the Net profit within the agreed period of amortization that is, the gradual payment of the loan monthly, quarterly, yearly etc which could be agreed terms of 1 to 5 years and more.
