Tuesday, February 3, 2015

How Can a Lender Determine the Eligibility of the Borrower?

Lenders want to attract high quality borrowers because that is crucial to growing their business. But who is a good borrower? What are the factors that a lender needs to consider while determining the eligibility of the borrower?
 
Credit history
 
This is of utmost importance. Before making a loan, the lender has to verify the personal credit history of the borrower. Lenders should see how well the borrower has handled their personal and business debts in the past.
 
If the borrower hasn't obtained loans in the past, assessing their credit history may not be easy. Then the lender should rely on the person's work history, job security and personal references. If these are satisfactory, the lender should consider making a loan.
 
Credit score
 
The lender should use a reliable credit-rating agency to analyze the borrower's payment history to their business obligations. The lender should also ensure that the borrower is up-to-date with payments on their existing loans.
 
Repayment capacity
 
The lender should consider unforeseeable events. For example, the company may suffer an unexpected downturn after obtaining the loan. This will affect its repayment capacity. The lender has to verify that the borrower has the capacity to turn other assets into cash should profits dip. Assets can be investment certificates, real estate holdings, machinery or equipment.
 
Cash flow
 
A cash-flow based lender should look at the income of the company. Cash flow is the company's net profits. Generally speaking, in order to obtain a loan worth $100, the borrower / company should have $150 in cash flow.
 
Collateral
 
Most lenders offer both secured and non-secured loans. When the lender makes a secured loan, it asks the borrower to pledge an asset as collateral. This can be real estate, machinery, inventory, and equipment etc.
 
Before applying for a business loan, the borrower has to consider quite a few factors:
 
·         Ideally, the loan applicant should be the chief decision maker in the company.
·         The company should be operating in the sector for at least 3 years.
·         The company or its owner must not have filed for bankruptcy in the last ten years.
·         The loan applicant should have paid his / her bills on time.
 
Factors that might affect your chances of obtaining the loan
 
If there is a lawsuit or a tax lien against the loan applicant or the company, the lender may reject the loan application. Having multiple sources of credit may also reduce the borrower’s eligibility for a loan.
 
What to expect after applying for a loan
 
The loan application should be filed by the owner of the company. If the company has several owners, at least two of them should sign the application. Companies that have been around for three or more years are more likely to receive funding.
 
If the owner or the company has declared bankruptcy in the last ten years, the lender will probably not entertain the loan application. However, a company can improve its chances of getting a loan by repaying its creditors. If there a lien or a judgment against the company, it should release all of them before applying for credit.
 
Profitability
 
The lender will typically look at the company’s tax returns to see if it had made profits during the past few years. If it hasn’t reported profits, the company will probably find it difficult to make loan repayments. In this case, the loan application is more likely to be rejected.

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