In a previous post, I showed you how banks calculate what they are willing to lend to you. I also showed your how how to do your own calculations so you can have an idea of how much money you will be able to borrow. There are also other factors that determine if a bank is willing to lend you money. I will share them with you today.
Note: every bank has their own decision making process, so I cannot tell you which factors your bank will use. But know that all banks use more than 1 factor.
Reminder: the starting point for any funder will always be your business plan, your business track record, your business financials and your collateral.
Capacity
The bank wants to know if your business can deal with any unforeseen challenges. They want to know how much financial reserve (= savings) you have. They will also look at whether your customers are recurring (= keep coming back) to see if the sales you are making will continue.
If you now say: Look, Tonia, you think if I had financial reserves I would apply for a loan?
You are 100% correct. And now you understand: banks do not want to take risks.
Capital
In addition to the calculations that I spoke about last week, the bank wants to know how much of of your own money you have put into the business.
They will also want information about your personal finances. If you have not put your own money into the business, the bank will be suspicious.
Why? Do you not have enough confidence to invest in your own business?
However, if you have a lot of money in your personal account, the bank may feel confident. Because they know that you will personally repay the money even if your business fails (it will act as collateral).
Character
What is your reputation? And what reputation does your business have in the market? The bank will be more willing to give you a loan if:
- your business has a history of repaying loans on time
- your business has good customer service
- you as a business owner have a good reputation in town
- you have strong references.
But if you are just starting your business or your personal reputation is not too good, the bank may refuse to give you a loan even if you meet the other criteria.
Communication
How honest are you when sharing information with the bank? Do they have to ask you, and then ask you again before you respond?
Don’t delay in giving information. Are you hiding certain things from them? For example about challenges your business faced in the past that you struggled to overcome?
Honest and open communication is the main way to build trust and a relationship with your bank. If you share information freely and honestly, you will improve your chances of getting a loan.
But even if they refuse to give you a loan today, you will make a good impression and it will be in your favour next time.
Conditions
This one can feel unfair because it is out of your control. Conditions equals the economic context that your business is dealing with.
For example the economic situation in the country, expectations of government changing business legislature, or market trends.
If the bank decides that the conditions are bad, your business must excel in all the other areas before you can get a loan.
But even if you do, they may still decide that they are not willing to take the risk.
My recommendation is to carefully consider whether it is truly necessary to apply for a loan.
- Have you considered other ways to get funding?
- If you are having problems maintaining cash flow, have you looked at your expenses and carried out cost reductions?
- Have you tried new strategies to increase sales or to retain customers?
Getting a loan can be challenging. There are other ways to generate funding from inside your business. This will allow you to put time and effort into your business instead of chasing the bank.
