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How banks make lending decisions

How banks make lending decisions

A guide most the areas banks look at when they're deciding whether to fund your business.

Will my depository financial institution requite me a loan?

Watch our video to hear from our finance practiced, Yvonne McLaren-Robertson, every bit she explains how banks make lending decisions.

If y'all're trying to decide what type of finance would suit your business, you might think of debt funding. If so, you lot'll probably want to know if you would exist accustomed for debt financing by a depository financial institution.

The first thing whatever bank or lender will exercise, is piece of work out the suitability of your business organization for finance. They'll desire to decide if yous'll be able to repay the corporeality you lot borrow (the principal) with the interest they charge within a reasonable length of time.

A potential lender will apply a wide variety of factors to assess your creditworthiness. The depository financial institution volition also use a more specific set of factors. At that place are factors they are required to think about because of constabulary and regulation, while other factors are used as function of their own policies.

A banking concern's decision to give you funding volition depend on the post-obit areas:

Your profit and cashflow

The bank will want to know that y'all will exist able to repay what yous borrow and involvement within the agreed timeframe. Therefore yous'll need to provide historical (where this is relevant) and projected financial information that demonstrates profitability and cash generation. This data should support your loan awarding.

Ensure that your financial forecasts are backed-up predictions (assumptions) supported by your financial information.

The banking concern is likely to challenge yous on how y'all think your business will grow with the funding they give you.

What security is available?

You'll need to pledge something as security for the loan, which is known as collateral.

Common forms of security include:

  • Real manor
  • Vehicles
  • Equipment
  • Inventory, structures and circumstances
  • Accounts receivable (your trade debtors)

The banking concern may also enquire you to provide a personal guarantee equally additional security.

What volition the loan exist used for?

The banking concern volition want to understand the marketplace conditions that affect your business organization.

The banks appetite to lend will vary from sector to sector depending on their item risk policies.

It's always worth finding out a bank's item risk appetite for your sector before approaching them for loan.

If your business would non match their adventure appetite you should approach other banks and alternative lenders.

Your personal credit assets

A bank tin consider your personal finances using character and your property/assets to secure the loan (collateral).

If you have a poor personal credit history, the bank might think it's possible your business concern could take like problems.

Collateral

If the bank decides that your business doesn't have adequate collateral to secure the loan, they may want your personal assets as collateral. Equally a minimum they may enquire for a personal guarantee.

It'south worth bearing in mind that if you fall curt on only 1 criteria, your awarding may still exist rejected. Therefore, information technology's important that you submit a clear and strong proposal to a banking company or alternative lender who will likely look for the same information.

Enterprise Finance Guarantee

Even if you have a valid business proposal, the bank may determine not to back up you if at that place is not plenty security available. To support such businesses, the UK Authorities has introduced a scheme called the Enterprise Finance Guarantee (EFG).

For businesses that have a proficient model but bereft security, the Regime volition provide a guarantee to the banking concern to cover some of the loan. The bank still makes the decision to lend y'all coin but the Government pays some of the cost if you cannot repay.

If your business' loan is secured using an EFG you volition end up paying a fee to the authorities on top of interest to the bank.

Observe out if the EFG scheme would conform your business on the British Business Banking concern website

Got a question nearly accessing finance?

Get in touch with our squad of experienced financial readiness experts who can help yous secure funding from a range of sources including bank funding, equity funding, and grants.

Disclaimer

This guide was written by our investment team who work with Scottish businesses and U.k. and international investors.