Banks Guidelines for Reviewing the Loan Application for a Business Loan

All the financial institutes have separate guidelines and follow the same to balance the market's equilibrium. However, banks also retain some basic principles to manage the customer and financial market. Usually, banks get several loan applications, and as per the direction of the Central Bank, they have to follow some terms and conditions to approve the loan; if you are wondering for the same guideline, then you are at the right place as here you will get the brief guideline followed by the banks amid reviewing the loan application for a business.

Some basic directions followed by the banks while approving the business loan.

Credit History

This is the essential segment that your banks consider amid the approval of the loan. Credit history describes your source of revenue and repayment ability. So, you need to maintain your credit history to get the approval of a business loan. However, if you are applying for a commercial loan, then you must check the balance sheet of your business. If you are running a business and generate the funds from the assets, then you must purchase the trade credit because the banks ask for the trade credit and they approve the loan to such borrower who has more than 5 trade credit.

Collateral against the business loan

Collateral is used in secured loans and is used to secure against debt. In short, the banks get the right to seize the property in case of repayment failure. Banks keep the collateral as the top priority because it secures their business. Otherwise, it will lead to the rise of NPA. So, to avoid the same, banks offer the business loan to the borrower with surplus assets. If the collateral is real estate, then the public records will be checked, and they will ensure the title deeds. In short, the banks will check whether the property is secured or is under litigation. These are the check and balance processes that guarantee the bank against the borrower’s debt.

LTV Ratio

LTV means Loan to Value ratio, defined as the loan the bank offers against the collateral value. LTV depends upon multiple factors, and some of them are listed below.

Property

If you are engaged in a real estate business and the same is occupied in condition, then the bank will offer the loan up to 75% of the collateral value. However, if the property is improved, the bank will only provide a 50% loan against the property.

Inventory

If you have inventory and it is in good condition, the bank will offer a loan of up to 80% of the inventory value. The inventory enables the bank to secure the debt, and if an NPA condition arises, the bank will sell the inventory to recover its loan amount.

Equipment

Equipment also plays a significant factor in the loan-to-value ratio. For example, if you have new equipment that can be easily sold at the market price, then the bank will offer the business loan up to 75% of the equipment's value. However, if the equipment is used, then it is quite obvious that its liquidation value will be lower, and in this case, the bank will lend the business loan at a low percentage.

Investment in the Financial Institute

If you have invested in a financial institution by purchasing bonds or equity, the bank will offer a loan of up to 75% of the value of the stocks. In short, bonds and equity serve as collateral.

Maintenance of Business Revenue

Banks always keep track of your business, enabling them to judge your financial health. According to atm solutions, if the cash flow is regular and debt is fewer, then the chances are high that your loan application will be approved. However, if the case is reversed, it means irregular cash flow and mismanagement of the fund will lead to the rejection of the loan because the banks check the balance sheet so that they can understand your repayment capacity, and if the graph of the balance sheet is poor then no doubt the banks will deny lending you a business loan.

Personal Guarantor

This option usually comes in an unsecured loan. In this type, no collateral is required, but the lender demands the security against the loan and, for the same, seeks the personal guarantor from the borrower who will repay the amount if the borrower fails to do so. But anyone can’t become a personal guarantor because banks have prescribed some conditions, such as having an excellent credit score and a good track record with the banks. Apart from that, a personal guarantor should have sufficient cash flow so that he/she can clear the borrower’s debt.

So, these were some of the basic principles that banks look at amid the loan application. So, if you are willing to go for a business loan, you have many lenders and banks who help you apply for business loans, SBI business loans, and hdfc business loans. ,Tyou still you have a chance to correct your application c,hart and for the same, you will have to follow some quick steps.

How do you improve your chances of getting a business loan?

Increase your cash flow.

In business, it is essential to increase cash flow and decrease debt. If this happens, lenders will be assured that their money is in safe hands, and they will provide the loan efficiently.

Clear Invoice

Always try to clear the pending invoices because they create a negative impression on the lender, who will conclude that your business is sinking. So, raise the business graph by clearing the vendors' pending invoices.

Minimize the Inventory

It is always advised to use as much inventory as is sufficient to run the business. Excess inventory may cause a surplus of cash, which will increase the expenditure graph. So, minimizing it will improve your chances of getting a business loan from the lender.