What Bank Consider Before given out loan to Business – credit analysis
The important of loan and advances in the banking industry is that ,they are major source of the operating income of banks , loan lending are the most profitable assets for the employment of bank’s funds.
The granting of credit depends on the confidence the lender has in the borrower’s credit worthiness since Credit evaluation and approval is the process a business or an individual must go through to become eligible for a loan or to pay for goods and services over an extended period.
The major aims of credit analysis is to determine the ability of borrowers to repay a loan in accordance with the terms of the loan contract- the objective of credit analysis of the bank must.
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1 Determine the degree of risk involved
2 Determine the amount of the credit it can grant
3 Determine the condition and term under which the credits granted
4 Evaluate personal factors that can affect the loan repayment by examining the past records of the borrower
5 Evaluate some other factor by engaging in economic forecasting to achieve result.
The lending officer must collect certain information such as,
a. collect relevant information that has help do with credit analysis
b. prepare and analyse the information collected
c. collate and analyse the information,and retain every necessary information for future use.
d. from the analysis, make every necessary recommendation in respect of credit delivery for application.
A good bank lending policy must be weighed carefully and with an open mind . There are basic principles behind lending and should serve as a guide .these are safety , suitability and profitability.
Safety– The safety of any loan and advance is of paramount important of the banks. Bank lay more emphasis on character, integrity and reliability of borrowers. The lending institution ensure that there is a reasonable loan and overdraft granted either to individual or company and would be repaid from profit and cash flow generated from operation of individual or company.
In pursuance of the safety requirement, the borrower must be able to provide an acceptable security which the bank could fall back on if the expected source of repayment should fail.
Suitability –The banker should satisfy himself about the suitability of the credit in advance . The bank has to ensure that the purpose of the loan is not in conflict with the economic and monetary policy of the government .
Profitability- Banks are setup to make profits, therefore any facility granted are expected to yield some profit to the bank , what determine the amount of profit is the rate of interest and other bank charges like sms alert and card maintenance fees.
Before you walk into any bank or apply for loan online be ready to answered some question which will be ask from your bank account officer.
1 How much do you want to borrow
2 Why do you want the bank loan in other word ,what do you want to do with the bank loan?
3 Are you financially strong enough to keep going if your plans suffer a set back
4 How long do you want the loan. Duration.
5 What security can you offer. collateral
6 Ho w do you intend to repay back the loan
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If this questions are answered by you, then the account officer has to analyse your credit worthiness and integrity such as capital, character, collateral, capacity and condition.
This seek to determine what proportion of total investment outlay s contributed by borrowers . It tries to measure objectivity, how much can adequately finance your business .This will necessitate the submission of a cash budget which will guide the officer in determining whether he is been asked to lend too much or too little .
None of this two position is attractive enough as it does not make any any good lending decision to grant a maximum amount which hope that you will be able to continue the balance from your personal resource.
Also when a bank approves an amount that is greater than the projected capital required ,the chances exist that the amount over above the project cost approved will be diverted to unprofitable venture that will adversely affect the repayment of the loan
This relates to qualities expected of you such as integrity,dedication to duty and moral attributes which could guarantee trust-worthiness of you as a borrower.The bank that associate with people of questionable character damage their own reputation far beyond the profit obtained on the transaction
As a borrower, you must possess attribute of honesty, integrity hardworking and good moral attitude .it is of important to understand the customer past character in respect to credit purpose.
As a borrower, you are expected to pledge tangible asset as a kind of insurance provision against unforeseen circumstance which may adversely affect the proposed loan repayment.
The following are the main securities accepted by banks :
I] A mortgage of stock and shares
Ii] An assignment of life assurance policy
Iii] A guarantee
Iv] Areal estate or landed property.
The ability for you to pay back as borrower . you are are credit worthy if you can produce an impeccable evident of the ability and willingness to repay loan as agreed. This view appreciates the fact that a man may be honest but if his ability to repay is below average ,his mere desire to repay the loan may not be sufficient to ensure the eventual repayment of the credit facility.
Another aspect of it is that a man may have the means to repay facility but may unwilling to pay .Hence the test should be will the borrow repay the facility when he has the means to do so?
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This only external factor to you as a borrower which help in ascertaining the prospect of the project in relation to the prevailing state of the economic. The political development that may affect business activities .Particular attention must be paid to the political and economic decision of the government that may place constraints on the abilities of you as business owner.
Granting credit approval depends on the willingness of the creditor to lend money after review of your loan application