Important Factors Considered By Banks Before Lending Money To Self-Employed Individuals And Business Owners-
Important Factors are as follows:-
1.Capacity.
2.Collateral.
3.Capital.
4.Character.
5.Conditions.
6.Age.
7.Experience.
8.Loan Amount and Repayment Period.
Business loans can help you grow your business and take it to higher levels of success. Banks are often very cautious when lending to self-employed people or business owners, so you need to share your business plan with the bank and show that you have a strong business management history.
Banks will be reluctant to lend money to people who are in a difficult situation (such as a large loan), so it is important to be clear about your loan requirements and payment plan. Banks usually look at 5 C of credit namely, amount, collateral, money, character, and conditions when assessing your personal loan application.
- Capacity -
The bank will check your payment amount before everything else. When you apply for a loan, the borrower must provide the bank with a letter, authorizing it to process your credit history. Banks will check your payment history with others and the amount of debt you currently have. The bank then reviews your salary and calculates your credit performance. The bank usually requires a minimum credit limit of 1.20 times.
- Collateral -
Sometimes the bank may require collateral or collateral for the applicant to protect its risks. Even the strongest businesses can sometimes see a downturn due to unforeseen circumstances that may interfere with a business's ability to repay its loans. The type of collateral a bank can ask for depends on the assets available; such as buildings, business assets, pieces of equipment, vehicles, current account savings, FDs, etc.
Lenders may need to authorize the bank to include a link to any of the assets you promise as collateral at the time of the loan approval. In the event that you are unable to repay the loan, the bank loan may grant you the right to control and sell those assets to recover its losses.
- Capital -
Banks will review your financial history and record, as well as evaluate your company's capital, the amount of money that a company can operate. In the unlikely event that a bank finds a company that does not have the capacity to operate efficiently, it may reject a loan application as it may view the same as a serious risk. Banks will also look at how much money you have invested in your business, as it shows how much you have been given in the success of your business. In that case, the bank finds that your financial position is much stronger than the company, it may still be able to authorize a loan if you provide a personal guarantee.
- Character -
The lender will also carefully consider your company's history, credentials and the reputation of your organization before approving your loan application. If you and your business have a good credit history, as well as a good reputation and reliable indicators, the chances of your loan approval are much higher. If your company has a history of non-payment of a debt or a bad reputation, banks may be reluctant to offer you a loan even if you may not meet certain conditions.
- Conditions -
Another important factor that a bank considers is the state of the economy in your industry, which you may not be able to control much. Even if your organization meets the requirements for volume and collateral, but if you work in a high-risk industry, the bank may choose to reject your loan application. One of the reasons for this is that the industry may be at risk of a sudden decline, jeopardizing a bank loan. To ensure that your loan is approved, you need to overcome difficult economic conditions and demonstrate the ability to withstand high levels of volatile business.
- Age -
In addition to the above, banks also take into account your age when assessing a loan application. Banks prefer to lend money to people in their 30-50 age group as they are considered financially sound. People in this age group have worked for a few years and have several years left to pay off easily. People over the age of 60 may find it difficult to get a loan and may be required to provide a mortgage before the banks approve their loan application.
- Experience -
A critical factor that banks consider is an experience. For, e.g., a person with 15 years of experience will be given preference over some who are just starting out or has only 2-3 years of experience. Banks also prefer borrowers who have been serving in the same industry for a few years while considering the loan application. In case a person has a record of shifting professions rapidly, then a bank may not approve their loan easily.
- Loan Amount and Repayment Period -
In addition to the loan amount, banks also consider repayment terms. They usually prefer applicants who prefer a shorter payment period. Because, e.g., a person applying for a 2-3 year loan, will be preferred over those who have applied for a 10-year repayment period, and so on.
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