No financial institution is same, neither their working style nor their policies and so is their sanctioning criteria. Sanctioning criteria of a Banks/ NBFC varies from others but few key points are always considered while determining the sanction loan amount i.e. current income, credit score and your current liabilities. A credit score closer to 900 reflects your responsible and balanced attitude towards your debts. This shows how carefully you have handled your previous credit cards, loans and other dues. This lets the lender feel safe about you being a safe borrower and a higher amount can easily be sanctioned.
Lots of factors are considered if a loan application received is from a businessman and some of this might not be apparent to the business owner. There is not a single parameter on which both a businessman and an individual are compared and the loan is approved. The bank/ NBFC will review the overall relationship of the company, including the investments, deposits and other services. To review the financial statements, collect reports of other credit agencies and other sources is the core competency of the credit analyst of the Bank/ NBFC. If the results are as per the standards of the lender your loan request will be approved.
Your repayment capacity has a direct relationship with your current income and liabilities (credit card dues, EMI’s, unpaid loan amounts etc.). This means if you fall in a lower income bracket and you have high amount of dues, the loan amount to be sanctioned will be lower as compare to those who fall in higher income and lower financial liability bracket.
Repayment capacity shows that the borrower is capable enough to handle the credit but the repayment habit is judged by the following points:
Past Performance: this shows the previous borrows of the individual and how they were serviced in past. It is an important point to know the score and contributes as an important attribute for the final score.
Credit Type & Duration: this also creates a significant impact on the credit score. The credit report clearly states the credit history and details of all types of secured and unsecured loans. High amount of unsecured loan is considered risky by the lender due to the higher risk of defaults, whereas an existing secured loan with an increased duration lowers the risk considered by the lender.
Credit exposure: this refers to the total amount of credit available to the borrower vs. the total outstanding balance in all the loan accounts. Higher used credit amount leads to the rejection of new debt or loan application.
Others: reasons like recent defaults on previous loan/ credit card, successful or rejected loan application/ credit card plays a vital role to determine the credit score of the borrower.
The Bank/ NBFC’s require a credit report of the company or an individual (or both) from an authorized bureau. The report includes the payment history, public filings and the credit score. Any negative information regarding the past due payments, outstanding taxes or any missed financial transaction create a doubt in the lender’s mind and the Bank/ NBFC might need an explanation for the same. Even if the reports are not up to date, it still provide a useful information to the perspective lenders.
The Bank/ NBFC require the financial statements for the last few years to compare and analyze the financial status. These statements include the balance sheet (net worth, assets & liabilities), income statements and the cash flow statements of all the accounts (loan & personal). The analysis of financial statement reveals the financial health, strengths and weaknesses and how the borrower will survive with the regular payments of principal and interest of the proposed loan. The financial statements should be prepared and verified by an accounting firm.
Many times even if the loan is unsecured, the Bank/ NBFC might ask for a security for the loan. in any case, if the borrower becomes defaulter the lender can seize and sell the asset to recover for the due loan amount. It is important to know that all assets cannot serve the purpose of security. For example, if the loan is applied to buy a specialized machinery for the business. In case of a default, it is not necessary that the specialized machinery is sellable to another. In such case, the borrower has to arrange for another asset which is acceptable for the lender.
When a borrower approaches the Bank/ NBFC for the loan, the lenders review the overall relationship with the other Banks. The credibility increases if the borrower is a depositor for several years before applying for the credit. Investments and a positive civic involvement is always counted as a plus point in your application process.
Before sanctioning the loan the lender will also evaluate the ability for the repayment options on the later date. This means that the borrower has to present the financial documents like the Profit & loss account statement or the cash flow statement while applying for the loan application. If the statements show that the borrower have sufficient cash flow to repay the loan amount, the loan application will be processed despite of poor personal or business credit score.
If the borrower wants to borrow for a new start up, it’s good to have a clear idea about your goals & ambitions. A well formulated business plan gives the clear understanding of the business track. A concrete business plan will give the clear idea to the lenders of your usage of the borrowed money as well as help you to achieve your goals with minimum hurdles. Clearly mentioning your thoughts will be viewed favorably and will help you to get you loan application sanctioned.
Creditors view the savings as a surety. Any kind of savings, cash or capital that the borrower wants to use in business at some point of time in future will impact the loan application in a positive way. Your current investment shows that the borrowers have plans to expand the business in future. In case of any failure in the plans, the borrower has to use the savings to pay the Banks/ NBFC’s the business starts moving smoothly. The savings work as a safety net for both the borrower and the lender. Without the savings it takes a long way to get your loan application approved.