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What Do Lenders Look For Before Lending Money?

By Due
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Your company is growing, and you need to purchase additional equipment and raise money to pay for rising accounts to receivable amounts. How can you persuade a bank to provide money for your company’s requirements so that you can have your business running smoothly and save money for retirement?

Here, we’ll tell you what a bank or any other lender will look for before they lend you money for your business. You will not only learn their measuring parameters for the company owners or self-employed persons but also understand what you have to keep up if you are a salaried professional and planning for a loan. Without wasting any time, let’s get into the details!

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The Purpose Of Loan

Give the lender a business plan first. Show them that your company is reliable and that you have a proven track record of success. Tell them that you need funding for your business, there are some things you could do with it. When lending to needy borrowers, lenders become uneasy and reluctant. Be precise about the amount of money you require, your plans for using it, and your repayment strategy.

The business plan ought to contain:

  • An overview of the company, its offerings, and its services
  • The management team’s expertise
  • A hostile atmosphere
  • Target audience
  • Financial records

Personal loans can be an easy method to receive a much-needed cash infusion. You can use them to finance home renovations, urgent medical expenses, the launch of a business, or even a vacation. But to qualify for a personal loan from a bank, you must go through a crucial process called client verification, which impacts how successful your loan application is.

Unlike mortgages or auto loans, personal loans aren’t often secured by any collateral, so lenders must adhere to tight eligibility requirements before accepting them. When reviewing a personal loan application, lenders consider your credit score, income, occupation, age, and repayment history.

Let’s examine the various aspects that banks look at when reviewing borrowers’ requests for personal loans so that you can stretch your retirements savings:

Essential Elements that Banks Take into Account Before Lending to Self-Employed People & Business Owners

You may grow your firm and elevate it to new success levels with business loans and make plans to cut business expenses. You must present the bank with your business plan and demonstrate a proven track record of successfully managing a firm. Banks are typically extra cautious when providing loans to self-employed individuals or business owners.

It is crucial to be explicit about your loan requirements and repayment strategy because banks will be reluctant to provide money to those in a difficult situation (like being deeply in debt). When assessing your application for a personal loan, lenders often consider the 5 C’s of credit: capacity, collateral, capital, character, and conditions.

  1. Capacity

Before anything else, the bank or lender will assess your potential for repayment. The borrower must provide a letter authorizing them to check their credit history when applying for a loan. They will look at how well you’ve paid off previous loans as well as your present level of debt. After examining your income, the bank determines your debt payment coverage ratio. It typically requires a debt service coverage ratio of at least 1.20 times.

  1. Collateral

A bank occasionally requests collateral or security from the applicant to reduce risk. Even the most resilient companies sometimes experience a period of decline because of unanticipated events that can make it more difficult for them to repay loans. A bank can request several kinds of collateral depending on the available assets, such as properties, business assets, equipment, automobiles, current account deposits, etc.

When a loan application is approved, borrowers might need to give the lender permission to put a lien on any assets they pledge as collateral. If you cannot repay the loan, the lender may have the authority to seize ownership of those assets and sell them to recoup its losses.

  1. Capital

Banks will examine your financial history and performance as well as your company’s capital or the amount of cash available for use by the business. If the bank determines that the company is undercapitalized, it may reject the loan application because it may view it as high-risk. Banks will also look at how much money you’ve put into your company because it demonstrates how invested you are in its success. If you provide a personal guarantee for the loan, they may still approve it even if it determines that your financial situation is substantially more vital than the company.

  1. Character

Before processing your loan application, the lender will also conduct a thorough investigation of the background of your business, your references, and the standing of your firm. You and your company are far more likely to get approved for a personal loan if you both have excellent credit histories, a solid reputation, and solid references. Even if you can meet the other requirements, lenders could be reluctant to give you a loan if your firm has a history of debt default or a poor reputation.

  1. Conditions

The state of the economy in your sector—over which you might not have much control—is another crucial factor that a bank considers. Even if your company can meet the collateral and capacity requirements, a bank may decide to reject your loan application if you work in a high-risk sector. One of the causes of this is the possibility of a quick decline in the business, which would put the bank’s loan in danger. You must overcome challenging economic situations and show significant skill in managing a risky firm for your loan to be granted.

  1. Age

When analyzing a loan application, banks also consider your age in addition to the previously listed elements. Banks favor lending to borrowers between the ages of 30 and 50 because they are seen as more reliable financially. People in this age range have been employed for a few years and yet have several years to repay their loans quickly. People over 60 may have trouble getting a personal loan and may need to put up security before banks approve their loan applications.

  1. Experience

Experience is a crucial component that banks take into account. For instance, a candidate with 15 years of experience will be given preference over one with only 2-3 years of experience or a less experienced candidate. When evaluating a loan application, banks favor borrowers who have worked in the same sector for several years. If a person has a history of changing jobs frequently, a bank can find it difficult to accept their loan.

  1. Loan Amount and Term of Repayment

They also consider the repayment time in addition to the loan amount. Applicants that select a shorter payback duration are typically preferred. For instance, someone who requests a loan repayment duration of two to three years will be given preference over someone who requests a more extended repayment period of ten years, and so on.

There are several benefits to becoming an entrepreneur after retirement, so give it a chance and secure a loan to become a successful business owner. Following the rules and regulations of a specific bank can aid you in successfully approving a bank loan.

Essential Elements that Banks Take Into Account Before Financing Salaried Professionals

  1. Credit Rating

The credit score is the first factor a lender considers when examining a personal loan application from a salaried professional. You may also receive loans with lower interest rates if you have a strong credit score or above 700. Your financial history and loan repayment capacity is reflected in your credit score. The type of loans you are presently repaying or have previously successfully repaid are considered when calculating your score.

The amount of debt you have accumulated, your history of repaying loans, how frequently you paid off credit card debt, and the number of missed equated monthly installments all impact your credit score.

  1. Current Revenue

The other things that lenders or banks consider are your existing source of income and your monthly costs. Before issuing you another loan, the bank representatives will also consider how much debt you currently have, which includes your existing home loan, auto loan, monthly payments, etc. Lenders will look at your debt to income ratio, which is calculated by dividing your gross monthly income by the sum of all your monthly debt payments. Your entire debt should not exceed 50% of your income.

  1. Employment Background

Employment history is considered as further evidence of stability and income. Before accepting loans, lenders want confirmation of recurring income, and candidates who regularly change employment or have no reliable source of income are viewed as troubling borrowers. You have been employed continuously and have a solid job history if you have worked in the same industry. However, this does not imply that you have to have consistently worked for the same business. People who work for themselves typically face more scrutiny than those with a steady monthly salary.

  1. Occupation

Your job is essential to your loan application. Some professions, such as those in government banks, the public sector, and PSUs, may be preferred by banks. The banks also prefer persons employed by blue-chip firms and other dependable professions like physicians, chartered accountants, engineers, and lawyers.

Self-employed or employees of private companies typically receive the lowest priority. A loan application is deemed weak if the applicant works for a company with a track record of not paying its employees’ salaries on time. A candidate with a history of frequently changing jobs also leaves a wrong impression. Banks, however, accept all applications similarly, regardless of whether they come from government or private sector workers.

  1. Payment Record

Additionally, banks carefully examine the borrower’s credit and loan payback history. Any unpaid debts may persist for up to 7 years, harming your credit score and loan eligibility. Banks may be reluctant to approve your loan application if you have a terrible history of repaying your debts or if you have overdue bills.

  1. Loan Amount

The quantity of credit that the borrower has requested is a significant consideration that banks consider. They will scrutinize the loan more closely and might even request collateral to reduce its risk if the loan amount is higher. On the other hand, depending on your relationship with the bank, a minor loan application can be accepted more swiftly. Before accepting your loan amount, banks will also consider your entire financial history, your ability to make payments, etc.

  1. The Loan’s Goal

The bank will also want information on the reason behind the personal loan. These lenders may reject your application, impose a higher interest rate, or even demand security if the loan is high risk (such as beginning a new firm without any prior expertise). If the loan is for a low-risk reason, such as home repairs and renovations or house construction, you might have no trouble getting it approved.

  1. Extra Income

Banks will review every EMI you are currently paying and the existing debt you are repaying each month. Getting approved for a personal loan will be simpler if you have a sizable income surplus after paying your EMIs. Low surplus money signals to the lender that you are already overextended and are more likely to default. When applying for a personal loan, you must consider your ability to make EMI payments and the amount of money you have left each month.

Several essential elements affect eligibility for personal loans. Keep in mind all the above are for a better chance of receiving a personal loan with a reduced interest rate. In addition, best small business loans consider how long the applicant has been a client of their business. The likelihood of your loan being accepted increases if you have maintained a positive relationship with your bank and a substantial bank balance. Once you’ve obtained your loan, be sure to make your payments on time so that your bank will be willing to approve your loan application the following time you wish to do so.

What do You do if Your Loan Application is Rejected?

A lender may reject your loan application for a variety of reasons. Your debt-to-income may be too high, or your credit score may be too low. It’s also possible that you requested a larger loan than the bank believes you can repay in light of your income, employment stability, and other debts that you still owe.

There are a few actions you may do to increase your chances of securing a loan in the future if a lender rejects your loan application:

  • Request the exact justification for the denial of your application.
  • Check your loan application for typos or factual errors.
  • Raise your credit score by paying off any current outstanding bills.
  • Verify your credit report for errors.
  • Boost your income
  • Examine lender specifications
  • Make a modest loan application.
  • Think about getting a co-signer.


  1. What Items Can Be Pledged as Security for a Personal Loan?

Only collateral is needed from lenders for secured personal loans. You can often use the following items as collateral when applying for a secured loan:

  • Money (kept in a savings or certificate of deposit (CD) account)
  • Car
  • Boat
  • Home
  • Stocks
  • Bonds
  • Insurance coverage
  • Jewelry
  • High art
  • Antiques
  • Collectibles
  • Priceless metals
  • Upcoming paychecks
  1. When may I get a personal loan?

Turnaround times for personal loans differ amongst online lenders, conventional banks, and credit unions. Online lenders are often the quickest; some even offer same-day approvals and funding on the same day or the following day. On the other hand, funding via conventional banks and credit unions could take up to seven days.

  1. Can you apply for a personal loan without proof of income?

Your ability to repay your loan depends on your ability to pay and the lender’s qualification criteria, which heavily weighs on your income. Most lenders want income documentation to ensure your capacity to make repayments. It’s recommended to refrain from taking on more debt if you don’t have a job or another source of income and can’t afford to take out a personal loan.

  1. What makes you ineligible for a personal loan?

The most frequent causes of personal loan denials are your income, credit history, and credit score. Poor, damaged, or no credit applicants often struggle with being approved for a personal loan. Even yet, having good credit does not guarantee that you will be approved for a personal loan. Lenders are typically unwilling to take on the risk if your salary does not demonstrate that you can make monthly payments.

Final Considerations

Before granting debt, lenders examine prospective borrowers using a set of criteria. The 5 Cs are the collective name for the categories that the criteria frequently fit into. Lenders must consider borrowers’ credit histories, payment histories, collateral on hand, money available for upfront deposits, and market conditions to guarantee the best loan terms.

You can secure the loan if you have a good record and income that satisfies the bank requirements of lending you a loan. You need capital to pay employees, expand your business’s marketing efforts, and cover any other operating expenses that may arise. In this case, a business loan would be helpful. Have faith in their abilities, and use them to grow your company.

Article by Pierre Raymond, Due

About the Author

Pierre Raymond is a 25-year veteran of the Financial Services industry. Driven by his passion for financial technology he has transitioned from being a quantitative stock picker, to an award-winning hedge fund manager, credit risk manager to currently a RISK IT Business Consultant. Pierre is the cofounder of Global Equity Analytics & Research Services LLC (GEARS) and a current partner at OTOS Inc.