How do lenders decide whom to grant commercial loans to?
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UPDATED: Oct 19, 2012
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Lenders, such as banks, go through a number of steps to determine who to grant a commercial loan to. While these steps often vary from lender to lender, they share common characteristics.
Understanding the information in these steps can be more thoroughly achieved through reading commercial loan articles and can help borrowers with their loan application preparation.
First, lenders view the application that a borrower submitted. Commercial loan applications typically ask borrowers about the internal details of their business. Those desired details might include identification of who the business partners are, the income generated by business operations, inventory of products or merchandise, and company assets such as offices or factories.
Lenders also view businesses’ and borrowers’ debt-to-income ratios. This ratio shows the balance between how much income a person and business have compared to the current level of debt they have. Borrowers and businesses with a large amount of debt compared to their income are generally not considered worthy investments.
Next, lenders will evaluate the collateral that borrowers offer to secure their financing. Collateral is any asset of value that can lower the risk of lending money for the lender. In the event a borrower defaults on their loan, the offered collateral can be seized. Businesses usually have collateral in the form of equity or company property, such as buildings or inventory. While there are such things as unsecured business loans, they are not common.
Finally, lenders will likely wish to speak with an applicant before giving financing to their business or startup. This interview is extremely important and can give an applicant the chance to show a lender that he or she is a confident, successful, and a viable borrower that will put the financing to good use. Lenders may be favorable towards longstanding customers that are seeking a commercial loan so as to continue keeping them on as clients.
After completing these steps, a lender will know whether or not to approve a borrower for business financing.