Think Like a Banker and Get Your Loan Approved!

Banks want two things – to make you a loan, and to reduce risk. They are expected to protect the depositors and owners’ funds. Generally, they use 6 key conditions to make decisions about loan applications. If you plan to borrow money from banks or any other lender, it is better you understand these 6 conditions..

1.    Character – This covers your personal characteristics, honesty, attitudes, willingness and commitment to pay back monies when you borrow. They usually use applicant’s credit history and score. Bankers are looking for a reliable borrower who demonstrates responsibility and good credit history. This is similar to a background check most employers do on a potential employee. I prefer to call it “know your borrower”. If you have history of ethical issues or litigations, why should bankers give you someone’s savings?

2.    Capacity – This is evaluated through the past track record and success of the enterprise. It focuses on two key areas:

a.    Do you have the ability to repay the loan? They will use different measures of financial soundness including financial statement analysis (past and projection). This condition can disqualify many new small businesses.
b.    Capacity check also includes the track records of the business owner(s) and the senior management. Can you run this type of business?
c.    Capacity also covers the legality capacity of the business to do such transaction.

3.    Capital – It evaluates the financial condition in a form of equity in the business. The greater the firm’s net worth or owners capital, the lower the risk to the provider of the loan. In simple term how much money do you have at stake in this business? Imagine approaching a bank to borrow $200,000 on a business where you invested $2,000

4.    Collateral – This reviews the extent to which the borrower will or can pledge assets to protect the provider of loan. Collateral includes property, lieu, government guarantee, insurance etc. In most cases, bankers prefer a collateral with value more than the loan amount of least by 120%.

5.    Conditions – What are the economic, technology and regulatory trends that can impact your business? What are the possible effects of these conditions on the business performance in the future? Interest rates, exchange rates, inflation, value chain etc. Many bank had cut their lending activities in 2008 due to the economic conditions.

6.    Compliance – This reviews the legality of the credit agreement and, in particular, the adherence to the regulations and law pertaining to the credit situation. This is a legal risk which can focus on areas such as ultra vires (beyond the power). The ultra vires problem arises where the borrower has not got the legal right to enter into a particular type of transaction.

Compliance can also include the regulatory requirement such as filing and paying tax, filling annual accounts, environment and safety issues etc.

Bankers usually attached score to each of these conditions in order obtain a credit score. It is the credit score that heavily influence the decision of most lenders.

Above all, it is important for small business managers to understand these conditions because even Small Business Administration loan typically required you to fulfill some of these conditions.

Ebrima is work as Senior Accountant in an international financial institution based in Lagos. He is also the founder of, a site that provide free tips on personal and small business success.

Ebrima Sawaneh:

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