Factors That Loan Providers Consider Before Granting Loans

factors loan providers consider before granting loans

Various reasons make people apply for loans. One primary reason could be having your own business and wanting to expand it. It could also be related to internal matters like purchasing more equipment for your offices, wanting to hire more staff for your growing business, or getting a loan to pay off a previous loan. To increase your production as the demand grows, you might have a plan in mind. In case you are short on funds, you have to apply for an urgent loan to put that plan into action. On the contrary, you might not even be a business owner. The reason you need a loan could be to pay off a mortgage for your house. 

These and various other reasons could be why most people go out looking for a lending company. This is so that they can get the money that they want and fulfill their requirements. 

Thankfully, most lending companies don’t ask for much documentation, unlike traditional institutes like banks. When you interact with banks, you have to give something as collateral. This is in case you are not able to pay the money back. The bank can take their time assessing the value of the collateral. They will need all sorts of documentation which can take a lot of time. 

If you are looking for fast loans, banks do not help out much. This is why non-traditional lending companies and individual lenders have become so popular lately. But that doesn’t mean that they don’t ask for anything. There are certain requirements that you need to fulfill, but these requirements don’t take much time, and you can get a loan in time to fulfill your needs. 

Lenders, too, want to make sure that you can meet their requirements and pay the loan back in time. 

Here are some of the things that non-traditional lenders may want to look at before granting you that loan: 

Revenue 

The first thing that a lender checks for is your annual sales or revenues, when they are trying to figure out whether to give you a loan or not. This is to find out if you are generating enough profit to pay them back which may include asking for your checking account balances and annual profits. They can also ask you about the length of time that you have spent doing this business. If you haven’t been in business for a long time, they can further ask you for your business plan. 

Business Plan 

If you have been in business for a long time, then you probably won’t need to show your lender your business plan. As every lender is different, some of them may ask to see your business plan even if you are not a new business. So make sure that you have your business plan ready, just in case they ask for it. If you are a new business, then be ready to submit your business plan. Your business plan should include your projections for your monthly cash flow for at least 2 years. If you are a startup, then you may have to provide the lender with a lengthier projection report. It all depends on the lender. If you have an established business, then the lender can ask you to show the schedule of current debts and loan balances. They can also ask you to show your payment schedules and maturity. 

Personal Financial Information 

If your business does not have a track record of producing revenue, then the lenders might ask you to share your financial position with them. This can include your personal credit history as well as your FICO score. They can also ask for the following things: 

• personal credit card debt 
• personal loans 
• liquid assets 
• real estate holdings 
• tax returns 
• personal financial statements 

This information will help the lenders find out about your spending habits. They can ascertain how you use your credit cards and how you are handling your payments. If you have a lot of personal debt, then the lenders look at it negatively. This means that when times are slow, you might not be able to cope with the reduction in income. 

Balance Sheets 

One of the things that the lenders pay special attention to is your balance sheets. If there is any discrepancy or if things don’t match up, this can immediately raise a red flag with the lender. Apart from your balance sheet, they can also ask you for a business summary. This may include: 

• What is the nature of your business? 
• What will you use the loan for? 
• How will you use the loan? 
• What is your current capital availability? 
• How will you allocate it? 
• How can you make sure that you stand out from your competitors? 

If you are not a small business but want to appeal for a loan to buy a house, the lender’s requirements change according to it. These are the things that lenders can ask of a home buyer: 

The Size of Your Down Payment 

The down payment plays a vital role when you are buying a house. The amount of the down payment will decide how much you can borrow for the installments. If you are making a sizable down payment, that could mean not needing a huge loan, and that will put you in the lender’s good books. This is because making a substantial down payment means that you are a low-risk investment. The lenders are always looking for people who present the least amount of risk. According to the industry standards, if you are making at least a 20 percent down payment, then you will be considered a low-risk opportunity, and the lender will be happy to work with you. But this doesn’t mean that to apply for a loan. You make a 20 percent down payment even if you can’t afford it. Some lenders will entertain your loan even if you are not making a sizable down payment. 

Your Credit History 

The lender will almost always ask to check your credit history. When the lenders go through your credit history and your credit score, they understand your money management skills. Moreover, they can deduce whether you will be able to pay the loan back or not. Therefore, you should make sure that you have already reviewed your credit report. 

Your Work History 

How will you pay back the loan? By making enough money and having a steady source of income. And that is why lenders check your employment history. They are just checking to ensure that you can afford to make the payments on time. So, if you are thinking of quitting your job or switching your career before applying for a mortgage, then that is not a very good idea. This may lead the lender to believe that you are not in a financially stable position. 

Final Word 

The fact remains that every lender is different, and finding the one who offers you a loan on favorable terms is your goal. So make sure that you do your research before applying for a loan. You will surely be able to find a lender who can provide fast loans, and is comfortable to work with.

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