What Do Banks Consider for Business Loan Approval?

         What Do Banks Consider for Business Loan Approval? Before understanding what banks look for, TerraBKK provides examples of different types of business loans and their characteristics as follows:

  • Overdraft (O/D): A readily available credit limit for working capital and enhancing business liquidity. This type of loan is highly flexible as interest is charged only on the amount withdrawn (via check). Interest stops immediately upon repayment of the principal, and no interest is charged if the credit limit is not used.
  • Promissory Note (P/N): A legal financial document used for borrowing, clearly stating the principal amount, interest rate, payment due date, and payment end date. This is a service for purchasing promissory notes within the approved limit.
  • Advance-Dated Check Purchase (CBD): If a business owner needs cash and wants to enhance short-term liquidity, they can sell checks that are not yet due to the bank. The bank will calculate the discount interest beforehand and transfer the money to the borrower's account.
  • Letter of Guarantee (L/G): For guaranteeing responsibilities to various entities, the bank will be responsible under the guarantee agreement. This is intended to serve as a guarantee for bid submissions (Bid Bond) and contract guarantees (Performance Bond), such as guarantees for contract execution.
  • Long-Term Loan (M/L): A lump-sum long-term loan suitable for investing in business expansion, such as purchasing new machinery, constructing buildings, or investing in fixed assets.

For business owners interested in loans to increase business liquidity, aside from viewing it from the borrower's perspective, let's also consider the bank's viewpoint on what factors they consider before approving a business loan for a business owner. TerraBKK summarizes the key points as follows:

Borrower Qualifications

 

Business loans can be applied for by both individuals and legal entities. However, since this is a loan for business operations, the qualifications of the borrower include “the credibility of the business”, such as integrity, knowledge, and business experience. Examples of necessary documents for loan consideration include copies of identification cards, company registration certificates, etc. The clearer the documents presented, the easier it is for the bank to consider the business loan. Many banks require that the business has been operating for at least three years to confirm its viability, but there may be special conditions for certain business groups, such as franchises, which do not need to wait three years before applying for a loan.

 

Purpose of the Loan Application

 

Banks want to know the true purpose of the business loan application since business loans come in various types for different purposes. Using a business loan for the wrong purpose may lead to defaulting on payments, resulting in “bad debt” for the bank. For example, an overdraft (O/D) is suitable for business circulation; if used for long-term purposes, it may incur unnecessary high interest and affect the business's liquidity.

 

Debt Repayment Ability

 

The bank wants to know the average monthly income of the business. This is assessed through account statements for at least six months, company financial statements, and copies of corporate income tax returns. For individuals, it can be assessed through sales invoices, purchase agreements, etc. In addition to income, the bank also considers the current debt burden of the business and checks the past payment history from the “credit bureau”. If it appears that the borrower has a low chance of repaying the debt, the likelihood of loan approval for the business loan will decrease accordingly.

 

Collateral

 

The types of collateral for business loans are similar to other loans, such as deposit accounts, land, buildings, bonds, and inventory. Banks prefer highly liquid collateral over low liquidity. The higher the value of the collateral compared to the loan amount, the more the bank favors it, as it reduces the risk of bad debt. Documents required for collateral include land title deeds, deposit account books, etc.

 

Business Environment

 

From the bank's perspective, approving loans to any particular business group excessively poses a risk that the bank must bear. Therefore, banks need to diversify loans across various business groups. Thus, if there is a trend in a particular business or if the business owner lacks the knowledge and capability to operate the business, the chances of receiving approval for a business loan will also be low. ---TerraBKK


Article by: TerraBKK Investment Tips

TerraBKK: Find Good, Valuable, Affordable Homes