Apply for a Bank Loan
Edited by Nerissa Avisado, Lynn
Applying for a bank loan is more than just accomplishing the forms and praying. This boldness in seeking a loan from a bank has probably come after much thought when you were in need of additional funds to finance a business, to build a house, to buy something big or expensive, or even to pay off smaller debts. A loan could be right for you. There are a few things to learn and think about when applying for a bank loan.
Different Types of Loan
- A loan that pays off your existing debts. This is a type that combines or assimilates all your borrowed money into one loan. This offers convenience as you settle it with a single monthly payment.
- This loan helps reduce the amount of interest you pay. It even improves your credit rating.
- Also known as an "unsecured loan", it means not any of your possessions are at risk when you cannot pay all your loans back.
- You can be sued, however, if you cannot update your payments.
- A much bigger amount tied up into something valuable that you possess, like your house. If you can't pay the loan, you risk losing whatever it is tied to your loan.
- This loan has a lower interest rate than a personal loan and can be paid over an extended period.
What You Should Know Before Applying for a Bank Loan
- 1Will you qualify for the loan?Advertisement
- It is going to affect your credit if your loan doesn't get approved.
- If your application is turned downed, it's more likely that the next bank will disapprove your application too because of the impression that you are a bad risk.
- It is suggested that before you file your application, you inquire from lending banks regarding their specific requirements.
- Among the things they want you to know is the minimum credit score required, the cash flow you need to present and other qualifying factors.
- 2How much money do you need?Advertisement
- To determine how much money you actually require, create a monthly cash-flow projection. For example, if you have a business, you should know if you customer can pay you in 60 days while you have to pay your vendors in just about 15 days. If that is the case, you need extra money to continue your business.
- It reflects poorly on you when you come to the bank borrowing $50,000 when from the cash-flow projection you presented, the bank finds out that you actually need $100,000.
- You should know exactly how much you need and how you will use the borrowed loan before applying.
- 3How much can you borrow based on the collateral you will use?
- Banks give a value to your collateral below what you expect the value should be.
- Aside from this, the bank only lends up to a certain percentage of the asset's value. For a new piece of equipment as collateral, you can be granted a loan up to 70 percent of its value and 60 percent for used equipment.
- 4Do you have cash flow adequate enough to repay the loan?
- Again, you have to prepare financial projections for your business before going to the bank.
- Be sure to include in your projections your plan for your debt repayment.
- A bank can spot a shaky room. You need to show a cash flow that is three times greater than your requirement for debt payment.
- If the bank finds out you are losing even just one customer, they can quickly say that you won't be able to make a scheduled payment for this month.
- 6What is your business credit score?
- Business credit score is different from personal credit score.
- If you have a not so high business score, it may be due to outstanding liens against your business.
- Check also if your vendors are reposting your payments.
- Boost your score by reducing your business credit cards balance.
- You can also request to increase your credit line. This way, the percentage of your available credit in use is lowered.
- The bank assesses your business. Your score is the deciding factor if you get the loan or not.
- No matter how impressive your personal credit score backed up by good assets, if, in any way, there is a report from your business contacts about your late payment practices, the banks can have second thoughts and may not approve.
- 7Do you have all the essential documents for your loan application?
- Prepare the last three years business and personal income tax returns, personal financial statements, and one to two years' financial projections.
- Not being completely prepared makes you unprofessional and when you have completed it, it is already outdated.
- 8Does the loan have a pre-payment fine?
- Payments made early are not penalized. Some states allow banks to charge prepayment penalties, but you can negotiate a compromise.
- Prepayment is valuable if you are hopeful that your business may grow soon as you may need a large line of credit.
- Having extra cash and a paid-off line of credit proves to the bank that you are responsible in your debt and able to manage an increase in your total credit.
- 9If you die, how will the loan be repaid?
- In the event of your death, your family can be affected by your unpaid business loan.
- If you are insured, the bank may come after that. If your house is your collateral and your business fails, your family can lose the house.
- It is advised that your assets be placed in your spouse's name, if she is does not already have an ownership stake in the business.
How to Get Your Bank Loans Approved
- 1Know your preferences
- Before marching to the bank, check websites on loan packages to find out what competitors are offering.
- Be aware of the kind of loan you are looking for, the payment terms you can afford, and your aim to pay the loan in the quickest possible time.
- Find the best deal for your loan and check out the fine print before proceeding.
- If you find the loan package that fits your need, get in touch with the bank and find their requirements for being eligible for a loan application.
- Make an appointment to meet in person and discuss the necessary requirements.
- Show a positive and professional demeanor during the interview.
- Be ready for questions and be able to back up all your loan application claims with facts.
- You are actually selling yourself, your business plan with confidence, and sincerity to be responsible for your loan.