Learn The Formula Banks Use To Approve You
Because of the recent economic disorder, getting money for a business has become a job for experts. Although the government pours a lot of money into banks, many of them have become less generous than they used to be. These days, the ability to get a loan is highly dependent on your knowledge of the approval process. Before you apply, you must have a clear understanding of the factors a bank takes into consideration when approving a commercial loan and make sure you meet the requirements before knocking on their door.
Today’s banks generally use a formula for approving or denying loans. Unfortunately, in the United States, once you’ve submitted an application for a business loan, it’s illegal for the bank to tell you how to qualify. They can only approve your application or turn you down. They are strictly prohibited from giving you any information on how to get approved because doing so would represent a conflict of interests.
Luckily, even though a bank can’t give you guidance on how to qualify for a loan, a business expert with knowledge of the guidelines can. There are many experts out there (for example, business consultants and former employees of banks or financial institutions) who are very knowledgeable about how to increase your chances of getting a business loan approved.
We’ve been involved in the process of securing loans from many different banks and know exactly what the requirements are for approval. Below, I’ll share the three-part formula banks use to determine whether you qualify.
- Amount and purpose of the requested loan: in other words, how much money do you need and what do you need it for? For the bank to determine the amount you qualify to receive, you will need to inform them of your monthly net income.
- Payment capacity: based on your monthly income, would you be able to make the payments on the loan you’re requesting? If the answer is yes, you’re well on your way to getting it.
- Proof of income and collateral: do you have documentation of your monthly income? Do you have a guarantee or some type of collateral, such as property, equipment, machinery, inventory or something similar (even if you still owe money on it)?
In order for the bank to determine whether you qualify for the amount you’re requesting, it is essential that you have certain documents that corroborate the factors mentioned above. This documentation includes the following:
- Business and personal tax returns for the past two or three years
- A list of your debts, both personal and business
- A list of your personal living expenses and your business operating costs
- A list of business and personal assets or guarantees
Your personal credit report is also necessary, although it isn’t as important these days as it was a few years ago. Banks know that millions of people in the United States have credit problems, so they’re being a little more lenient now, considering the financial crisis and certain situations that were beyond people’s control.
The formula above is especially helpful if you’re looking to purchase or refinance a property or if you need capital to operate and expand your business. You can use this information to make sure you’re prepared. “Ask and you shall receive.”
That’s it for now. Till next time. And remember that there’s nothing like being your own boss!