To qualify for a business loan, business owners have to show the financial institution the worthiness of their credit. Financial institutions generally follow a specific set of rules when assessing loan applications. The qualifications include ability to repay the loan, security used against the loan, assets of the business, loan circumstances, and the character of the business.
1. Ability to Repay Loan
• The financial institution assesses the small business’ ability to repay the loan. Business owners must explain in detail when and how the loan will be repaid. They must reveal the condition of the business expenses and revenue and the amount of cash flow.
• Credit history is also evaluated including previous repayment history.
2. Security
• Security, also referred to as collateral, is the property or goods a small business can provide the financial institution with to forfeit if the terms of the loan are not met.
• Security can include buildings, equipment, products or even the home of the business owner.
• Security may also include a guarantee that if a business owner cannot repay the loan, an additional party often called the cosigner is responsible for repayment.
3. Assets
• Assets refer to the amount of funds invested in the business that are risked if the business does not succeed.
• The amount of assets is an important indication of probably of repaying the loan.
4. Circumstances
• The first aspect is the general conditions of the economy and the outside environment enclosing the business and financial institution. Recession and phases of strict credit are considered when it is harder for businesses to repay loans and difficult for financial institutions to locate funding for loans.
• The second element describes the loan purpose such as expansion of the business, acquiring new property, or replenishing working assets.
5. Character
• Character is a personal opinion made by the financial agent about the potential client. The agent evaluates references and financial background to make a decision regarding the dependability of the client to repay the loan.