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Wednesday, October 7, 2009

How to apply to banks and other lenders for Loans

By

Onwueme Paul


One of the greatest challenges faced by businessmen while trying to secure loans for expansion or other projects is how to properly present their applications so that banks will favourably attend to it. However, there is the need to prepare yourself adequately prior to making your application. That is the focus of this article.

What is a loan?

A loan is idle capital granted to a willing user to carry out a productive activity or meet a productive need which promises profit as reward. The one who grants a loan is called a lender while the one who receives it is called a borrower. There are different kinds of loans and they depend on the length of time and the nature of the agreement between the borrower and the lender. Every economy needs to operate a mechanism that manages and operates a loan system which provides capital to enterprising individuals to create wealth with and protect lenders against loss of capital as well as reward them for their efforts.

Classification of loans

With or without collateral

• Secured
• Unsecured

Purpose

• Personal/individual/consumer e.g student loans, employee loans etc
• Commercial e.g business loans for increasing working capital
• Industrial such as industrial bonds and debentures
• Government including treasury bills

Duration

• Short term include loans that last less than 5 years typically 2 or 3 year loans
• Medium term such as 5 to 10 year loans
• Long term loans over 10 years

How lenders expect borrowers to use loans

Lenders expect borrowers to invest loans in practical and profit making ventures, commercial activities that have a profound effect on the micro or macro economy such as manufacturing, construction, retailing and other viable commercial activities. At the very least they should be invested in interest bearing investments more like fixed income investments like deposits, bonds, treasury bills and other similar investments provided that the rate of return is greater than the interest payable.

Where and when should loans be obtained?

Ideally a bank (commercial) should be the best place to seek a loan. But a number of restrictions could prevent any enterprising individual to seek such loans. For instance it is not uncommon for loan applicants to be turned off by bank loan requirements such as collateral, high interest rates, and very short repayment period. Naturally one would want to seek alternatives that offer stability of returns and peace of mind to the borrower. Hence one should seek loans from the following alternative means;
• Co-operative societies
• Membership associations
• Personal savings and previous investments
• Loans and gifts from friends and associates
• Micro finance loans
• Angel investors
• Non governmental organisations
• Employee loans among others

The best time to seek a loan is when you have done the following things accordingly;

• You have been able to identify a business opportunity especially one that is largely untapped
• You have thoroughly investigated the opportunity and have found it viable and profitable. Having professional experience in related field or business will be an added advantage in your loan application
• You have a good business plan
• You have an exit strategy in the event of failure
• You have a very good loan repayment plan
• You have adequately made personal commitments to contribute to the success of such as opportunity
• You are willing to give up time, energy and other resources to tap into the opportunity
• You have been able to establish a productive relationship with your prospective lender
• You have established either creditworthiness or considered a not too risky borrower by your prospective lender (ability and willingness to repay the loan make you credit worthy and this can be deciphered by an experienced lender)

What are lenders looking out for in loan applications?

Whenever you seek loans, there are certain fundamentals you must not overlook. These fundamentals are the yardstick lenders use in deciding whether or not to grant your request for loans. Here are the fundamentals;

1. Security of borrowed capital. All lenders are interested in knowing whether or not they will ever recover their loaned money or asset (what they simply want is an assurance that their borrowed capital is at least intact). If this question cannot be sufficiently answered then the lenders would rather keep their money than take whatever profit or interest your venture promises. Hence they may consider your possession of collateral or guarantor/sortie as enough protection from the risk of loan loss. Besides this having a good reputation or integrity could also provide a measure of assurance to the lender.

2. Knowledge and/or experience of intending venture by the loan applicant. How well you know and understand your business will determine whether the lenders would consider your application a big risk, mild risk or no risk whatsoever. Your knowledge and experience in your intending business is viewed by lenders as capital in lieu of money.

3. Purpose for seeking loan. Why do you need the loan? What will you do with the borrowed capital? How will you effectively use the loan to accomplish your financial goal? The lender is very much interested in knowing why their capital is needed and how their capital will be used.

4. Repayment plan. How will you repay the loan? The lender will not suggest to you how you should pay back. After asking sufficient questions about your intending or existing business, he/she will be interested in knowing whether you have any plans to repay and when the plan will take effect. The reason this aspect matters to the lender is because it ultimately determines whether you are out to take him/her for a ride. Will you be so interested in seeking a loan to solve a ‘problem’ and not know how to repay it? A poor repayment plan is a slap in the face of any willing lender. Your entire application will be rejected on this sole oversight.

5. How committed are you to your venture? The lenders want to know if you are willing to take reasonable risks in your business in order to make it succeed. In addition they want to know whether you are willing to sacrifice some of your valued assets to make your venture a success. This commitment on your part tells them you consider the success of your venture very important and since the repayment of loan plus interest depends on the success of your business, the lenders will often feel convinced that you deserve the loan.

Tips on how to apply for loans

1. Get your business plan well written and packaged. If necessary consult a business plan expert to help you manage and present your business plan in the most organized and professionally written form
2. Make enquiries about loan requirements noting what the bank’s preferences are.
3. Prepare your application letter well ahead of your meeting.
4. Don’t apply for loans when you have a bad reputation for late payment
5. State the purpose and date of loan request and redemption
6. Have a credible guarantor or sortie ready to stand in for you
7. Assets like shares, bank accounts, insurance policies, and other financial assets and jewellery and landed properties are usually preferred as collateral to physical assets like cars,
8. Banks usually interview applicants to ascertain their credit worthiness (ability and willingness to repay loans), be prepared to demonstrate these
9. Research the background of the lender always ascertaining their profile towards loan applicants
10. SME focused banks are more likely to grant loans to SME entrepreneurs than other commercial banks so try and note the difference.
11. Wish yourself good luck

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