Ravi Chandran
Chief among the factors for the success of SME loan applications is to think of getting credit from the lenders’ perspective
Borrowing money is a requirement of almost every business regardless of whether it is a start-up or an on-going business. First, you will need to identify many of the factors in creating and maintaining a lender/borrower relationship.
Next, you will need to examine the SME loan applications from the lender’s perspective.
Table of Contents
Establishing a Relationship with a Lender
All business owners – whether their businesses are large or small, well-capitalised or operating on a shoestring ‑ should develop a working relationship with their primary lender.
However, remember that the lender’s first responsibility is the financial health and profitability of the lending institution, just as your first responsibility is to your business. You would not jeopardize your business to save the lender, so don’t expect the lender to jeopardize the lending institution to save your business.
The type of relationship we are discussing here is an arms-length business relationship between you and the lender. Your expectation should be that the only way the relationship will continue is if the relationship is in the best interest of both parties.
There are a number of steps the borrower can take to develop a relationship with the lender.
For SME loan applications to be successful it is important to follow these suggestions:
Select the proper lender
Shop around to find the right lender. Lenders have certain types of loans and businesses they like to work with and other types they prefer not to fund. Find out what types of loans and customers each lender is interested in serving. Your business may be too large or too small for some lenders. The lender may not have any experience funding your type of business.
efore you put in a loan request, be mindful that most start-up businesses need lenders who understand their unique situations.
Make a professional loan request
When applying for a loan be prepared to present all aspects of your request so the lender can make an informed and accurate decision. Put in writing what you want to do. This may involve preparing a business plan.
Apply for the loan early
Don’t wait until you need funds to apply for the loan. This puts pressure on the lender and increases the likelihood of loan rejection. Making a loan request well in advance of the need for funds shows the lender you have good planning skills.
Establish a credit history
Borrow funds for short periods and repay promptly to establish a track record of proper loan repayment.
Get to know your lender
Invite your lender to visit your business. Introduce the lender to your employees.
Keep your lender informed
Share your plans for the future. For a start-up venture, the new business will need to have a fully developed business plan to share with the lender. Included in this business plan must be a clear indication of how the business will be financed. The plan must show how the management team will make the business successful.
Don’t surprise your lender
For SME loan applications to be successful, you must be honest. If you foresee repayment problems, tell your lender right away. There may be a solution and the lender can be a helpful resource. Lenders would rather restructure loans for repayment than have to foreclose on the loan.
A Lender’s Perspective on Making a Loan
Over the years, financial lenders have developed several simple approaches to assessing the feasibility of making a loan. These approaches can be used regardless of the type or size of business involved. Getting approval for a loan is a good thing, getting rejected may be even better. Even after going through this exercise, the lender may reject your loan request.
Even if your SME loan applications are not successful, don’t take the rejection personally. The lender is in the business of making loans. But something in your request caused the rejection of your loan. Talk to the lender and ask why the loan was rejected. The lender may have identified a weakness in your business that can be corrected before it causes major problems down the road.
Lenders consider a number of outside circumstances that may affect the borrower’s financial situation and ability to repay, for example what’s happening in the local economy. If the borrower is a business, the lender may evaluate the financial health of the borrower’s industry, their local market, and competition.
Some lenders develop their own loan decision “scorecards” using aspects of the 5 C’s and other factors. Example: borrower’s credit used vs. credit available.
When borrowing cash, remember that the money you borrow is yours to spend, but you’re taking on a real responsibility to pay the money back! You need to make monthly loan payments and usually have other costs called interest and fees.
