What banks are looking for when you borrow money
Your bank is likely to assess your request for funding based on a variety of criteria, including the amount you have personally invested, the capital sum and terms you’re asking for, your business idea, and the experience you have in running that sort of business.
This article takes a brief look at some of the criteria your bank is likely to use when assessing an application for finance. Knowing what your banker will look at should help you fine-tune your credit application.
On this page
- Your character
- Your personal capability
- Your business capability
- Your financial commitment
- The reason you want the money
- The amount of money you want to borrow
- The terms you are looking for
- The security you’re able to offer in return
Your character
Do you have a track record in the business world or in the community? Are you known to behave with honesty and integrity? What’s your previous credit history? If you don’t have a track record in business, the bank manager may well rely on their intuition to a certain extent, but they will also run some background checks on you. Your bank is almost guaranteed to look at your character and reputation before they lend you money. This is likely to include a credit or reference check, even if you have been banking with them for a while.
Your personal capability
Do you possess good general business skills and experience? Do you have a track record of competence and business achievement? You might, for example, be a very good scientist or technician but have very little experience of running a business… so what makes you think you can run a business successfully? The bank will also be assessing if you have the skills to take your business to the next level.
Your business capability
Does your business have the right qualities to succeed in the marketplace? Have you got good staff and systems in place? Can the business operate independently of you?
Your financial commitment
Your bank will also look to ascertain your level of investment in the business. Have you put your own finances on the line? If not, why should the bank take on more risk than you?
The reason you want the money
Your bank will assess whether your business idea or model has merit and is potentially profitable. They will be looking to see what you’re doing in the way of market research, assessing the competition, and testing your idea in the marketplace.
In the case of an established business, they’ll want to know if you have a track record of success in the marketplace. You should also tell them how you’ve protected your intellectual property (such as brands, trademarks and patents) and assessed the barriers to competition (how easily competitors can copy your idea or business model).
The amount of money you want to borrow
The amount of money you want to borrow will also be evaluated by your bank. They’ll want to confirm that your business can afford to service the amount of debt you’re asking for. You’ll need to show that your business has a strong and reliable cash flow that is enough to continue to run the business and meet the interest payments and capital repayments when they fall due.
Your bank will also check whether the amount you require is appropriate. For example, it’s common for businesses to overestimate or underestimate the amount needed to fund expansion or provide adequate working capital.
The terms you are looking for
You should be prepared to explain how you intend to repay the loan amounts and show financial projections to back this up. If your business is seasonal, then factor this in too. Your bank will be looking to see that you’re not overstretching the capabilities of the business to service the loan and that you’re not going to be perpetually in debt. For instance, trying to pay off a loan too soon can be disastrous.
They will assess worst -case scenarios and try to work out the minimum turnover you need to remain profitable. The greater the perceived risk for the bank, the higher the interest you’re likely to be charged.
The security you’re able to offer in return
Your bank will be looking for assets such as buildings that they can sell if things go wrong. The asset must be free of encumbrances, such as restrictions under the resource management act that might reduce its market value.
Note that specialised expensive machinery is often only of limited value to the bank as security because it is often difficult to sell for anything close to its purchase price or book value. If your business is structured as a company, the bank will most likely also require your personal guarantee for any loans of substance.
- This information is provided by New Zealand Trade and Enterprise
