All the financial institutes have separate guidelines and they follow the same to balance the equilibrium of the market. Even though, the 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 and 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 which 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 and if you are running a business and generated the fund 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 the secured loan and is the security against the debt. In short, the banks get the right to seize the property in case of failure of repayment. Banks keep the collateral at 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 that borrower who has 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 process that secures the bank against the borrower’s debt.LTV Ratio
LTV means Loan to Value ratio and it is defined as the loan offered by the bank 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 then the bank will provide only a 50% loan against the property.Inventory
If you have inventory and the same is in good condition then the bank will offer the loan up to 80% of the inventory value. The stock of inventory enables the bank to get secured against the debt and if in case, the NPA condition arises, then the bank will sell the inventory to recover its loan amount.Equipment
The equipment also plays a significant factor in the Loan to Value ratio. For example, if you have new equipment and can be easily sold out at the market price, then the bank will offer the business loan up to 75% of the equipment value. However, if the equipment is used then it is quite obvious that the liquidation value of the same 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 the financial institution by purchasing the bond or equity then the bank will offer the loan up to 75% of the value of the stocks. In short, you can say that the bonds and the equity serve as collateral.Maintenance of Business Revenue
Banks always keep the track record of your business and this enables 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 reverse 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 seek 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 and that is; a person must have 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 could 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 are helpful for applying for business loans, SBI business loan, hdfc business loan. then still you have a chance to correct your application chart and for the same, you will have to follow some quick steps.
