By Emeka Anaeto
Please refer to last week’s publication (this column) on this topic which deals with basic documentations and requirements, the starting point to prepare before applying for a loan.
Today’s part focuses on considerations that determine if your loan application would be successful. It should be noted that to be successful the loan applicant should be thinking like the banker who is going to appraise the application. Below are the first three considerations.
Two major considerations here are: 1.) How much loan in relation to actual amount needed by the business (there is a model for calculating this which is not part of today’s article), and; 2) How much loan in relation to how much the borrower currently has in the business. In the first consideration the lender wants to be sure the borrower is not overstating/ understating his financial needs. It is also important for the borrower to be careful not to carry loan funds that would not be fully applied to profit yielding otherwise he would be carrying higher cost burden. In the second consideration banks believe that if the customer has a reasonable amount of his own money in the business he will have more commitment to its success. It also demonstrates seriousness of the business as a going concern, thus reducing lender’s risk.
PURPOSE OF LOAN
The purpose and how the loan would be utilized should be clear to the banker before he considers lending. The stated purpose must be in line with the bank’s credit policy while guiding the application of the fund against possible diversion. It is also critical for the borrower to stay focused and demonstrate his business plan integrity to convince the lender that his money is safe.
Two basic factors are considered here: First is the nature of loanable funds available in the banks, and then the requirements of the business. Since most of the deposits (loanable funds) in banks are short term most loans are also short term ranging between 3 months and one year.
In few cases it is shorter than 3 months and longer than 12 months. If it is an overdraft granted to a business customer for 3 months or 6 months for example, it can still be renewed (rolled over) for another 3 months or 6 months provided the account is conducted satisfactorily by the customer. The nature of the business may easily fit for this deposit structure in banks. For instance, an import business or simple LPO for supply of goods would easily fit into a three months loan. However, even if it is not, the business cycle would be restructured to fit into the loan structure. More on this next week Thursday.