Factors That Lenders will Check before Lending Money
Many people think that credit is the only factor needed to avail of an easy business loan. Although credit does play a big part, it is not the only deciding factor. No matter your credit value, you always want to put your best foot forward when applying for a business loan, personal loan, etc. However, this can be a daunting task if you are not aware of the things your loan provider or lender is looking for.
Apart from having all the business loan documents, there are certain factors or criteria that banks and other financial lenders consider before lending you the money. So, here are the most important factors lenders will check before lending you the money.
- Your Credit
Almost all the loan providers and lenders check your credit score and report because it gives them insight into how you manage the borrowed amount of money. When you are done with your MSME registration, banks or lenders do check your credit history. If you have a poor credit score, it increases the risk of default and scares many lenders. A good credit score ranges between 300 to 850. So, the higher you score, the better for you to lend them money from lenders.
- Size of Down Payment
Some business loans do need a down payment, and the size of your down payment judges how much money you require to borrow. We can take the example of buying a vehicle where if you pay a good down payment, you will need to borrow less from the bank. In some cases, you might also get an easy business loan without a down payment or a small down payment, but you will need to pay a higher interest rate.
- Debt to Income Ratio
Many lenders also consider the Debt to Income ratio before lending you the money. This factor gives an idea of your monthly debt obligations as a percentage of your monthly income. Many lenders also like to see a low debt to income ratio, so if your ratio is more than 43%, your debt payments cannot take more than 43% of your income. However, you might still get a loan if your income is high and your credit score is pretty good, but many lenders can turn you down.
- Income & Employment History
Of course, all the lenders want to know whether you will be able to pay back what you have borrowed or not. For that, they need to see whether you have sufficient and consistent income or not. Although the income requirements vary upon the amount you need, lenders will need to see a higher income if you plan to lend a considerable loan. It would be best to assure lenders about steady employment to feel confident that you can keep up with the payments.
- Liquid Assets
All the lenders wish to see whether you have some cash in savings or not or whether you have some assets that can be easily turned into cash above and beyond for your down payment. This reassures the banks or financial institutions that even if you experience a slight financial obstruction like losing a job or some financial issue, you will still keep up with the payments. When you don't have much cash saved up, you will need to pay a higher interest rate.
- Loan Tenure
An Individual's financial circumstances may not change over a year or two, but they might change over ten or more years. It is also possible that your satiation can vary a lot. Sometimes these changes are better, but if they worsen, it could impact your ability to pay back the loan. Usually, the financial institutions or lenders will feel more comfortable providing you with the loan for a shorter period because you will be able to pay back the loan shortly.
- Value of Your Collateral
Collateral is one thing you agree to give to the bank if you cannot keep up with the loan payments. All the loans that involve collateral are called secured loans, while those without collateral are called unsecured loans. Secured loans have a low-interest rate when compared to unsecured loans. The value of your collateral also determines how much you can borrow from a bank.
While concluding, we can say all these things should be considered other than business loan documents before lending money.
