Once you have decided that you will approach a bank for a loan, you need to know the basics of a loan, how the bank decides to give a loan, and the right procedure for asking for a loan. Borrowing from a bank is much different than borrowing from friends or family, so you need to be fully prepared with proper bank selection, documentation, a proposal, and a plan of approach. A bank, being a for profit organization, will have policies favoring itself, and will adopt all possible ways to ensure that the loan does not become delinquent. In this process, the bank will look forward to certain things, like: the solvency status of the borrower, credit history and documentation. A bank will first gather information about your solvency status, i.e. whether you are solvent enough to pay back the loan or not. Two of the other most important things bank will look upon are:
A bank will look at your credit history, and the kind of reputation you have maintained in your past banking and loan related transactions. General banking dictates that a bank must classify the loans they provide into several categories. Among those categories, borrowers whose loans turn substandard or bad will be listed under a separate list and such names will be provided to credit information centers. If you bear a significantly poor credit history, your name will obviously be recognized by credit information centers. Banks will search the names of the loan applicants before providing loans and if they trace your name to such list, it is unlikely that you will be granted loan.
However, if you have any proof that the information on such a list was misstated or otherwise incorrect, you may want to submit an application and ask for the amendment, before approaching the bank. This is why one of your primary tasks prior to applying for a bank loan is consulting the credit information centers.
Since you are starting a new business, it’s highly likely that you might not possess any credit history. In such a case, the bank will look forward to other ways of securing its loan, like collateral security against the loans. If you feel that the same is going to happen to you because of lack of your credit history, make sure you have ways to assure the bankers of the security of their loans. You might want to drop the proposal with enough collateral security against the loans. Or you might as well create a new credit history, and a good one at that, by taking short term loans and repaying them in time, asking relatives and friends with good credit history to recommend you, or even opening a bank account in the concerned bank and doing some transactions through it.
As stated above, use of formal instruments and valid contracts is a must, as banks give optimum focus on documentation. Nevertheless, documents are of equal importance to you as well because at the end, it’s only the documents you possess to prove yourself against any charges of gross negligence. Having realized this, you need to be prepared with some important documents to prove your identity, credit history, banking history with the bank, ownership and valuation upon the prospective collateral securities, draft of the proposal against which the loan is needed and so on. These might include:
- Your citizenship or passport to prove your residency
- Past banking agreements to prove the banking history
- Registration certificate of the business to prove the legality and authenticity of the business
- Executive summary of the business plan to show efficiency of the business
- Other documents as prescribed by the bank
Meanwhile, another important thing to focus on is the cost flexibility of the banks. You will need to compare the available alternatives to find the bank with the best services in terms of variables like interest rates, maturity period, renewal policies, contingency rates and others.
What if the bank rejects you?
If somehow a bank rejects the loan proposal, your next step should be to trace the reasons for such a rejection. On finding any problems, make sure you try your best to improve upon your weakness. You will have to approach other banks for the loan and you might not want to approach another bank with the same weaknesses, still on your record. For an example, if the bank has rejected the loan proposal because it was not satisfied upon the perpetuity of your business, work on making the proposal and draft of your business plan more attractive and assuring. Find persons who can recommend or testify to your business, and your business perpetuity will seem more assuring.