Loans 101: Loan Application to Loan Approval
There are literally thousands of women who
have never applied for a loan. They might be frightened by the whole
process or they might think they don't have enough income or credit to
qualify for a loan. Whatever the reason, women can and do get loans, business
loans, personal loans, and home loans everyday.
Most women don't realize that with a credit
score of only 580 to 620 they can qualify for a home loan if they have
a good employment record to help with the qualification. While several
years of employment at one place is a good plus, even 6 months to a year
at one job is helpful and can get that loan approved.
If women can show that they can make repayments
on a loan their chances are good. The following information will help women
in understanding the loan process from loan applications to loan approvals.
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A loan is a type of debt. Like all debts,
a loan involves the re-allocation of money over a period of time between
the borrower and the lender. The borrower initially receives an amount
of money from the lender. This money is paid back either in full or in
regular installments (with interest of course).
Acting as a provider of loans is one of
the principal task for financial institutions such as a bank. For banks,
loans are generally funded by deposits. That's how banks usually earn.
Their deposits are loaned out and when the borrowers pay with interest,
viola! Earnings for the bank.
Other types of debt include mortgages,
credit card debt, bonds, and lines of credit. A mortgage is a very common
type of debt used by many individuals to purchase housing. In this arrangement,
the money is used to purchase the property. The bank, however, is given
the title to the house until the mortgage is paid off in full. If the borrower
is unable to pay, the bank can repossess the house and sell it, to get
their money back.
The abuse in the granting of loans is known
as predatory lending. It usually involves granting a loan in order to put
the borrower in a position that one can gain advantage over him or her.
When applying for a loan,
you must prepare a written loan proposal. Make your best presentation in
the initial loan proposal and application. You may not get a second opportunity.
Always begin your proposal with a cover
letter or executive summary. Clearly and briefly explain who you are. Include
all there is to know about you. Your business background, the nature of
your business, the amount and purpose of your loan request, your requested
terms of repayment, how the funds will benefit your business, and how you
will repay the loan. Keep this cover page simple and direct.
Many different loan proposal formats are
possible. You may want to contact your commercial lender to determine which
format is best for you. When writing your proposal, don't assume the reader
is familiar with your industry or your individual business. Always include
industry specific details so your reader can understand how your particular
business is run and what industry trends affect it.
Loan Repayment: Provide a brief written
statement indicating how the loan will be repaid, including repayment sources
and time requirements. Cash flow schedules, budgets, and other appropriate
information should support this statement.
Existing Business: Provide financial statements
for at least the last three years, plus a current dated statement including
balance sheets, profit & loss statements, and a reconciliation of net
worth. Aging of accounts payable and accounts receivables should be included,
as well as a schedule of term debt. Other balance sheet items of significant
value contained in the most recent statement should be explained.
Projections: Show how your operations will
make money. Include earnings, expenses, and reasoning for these estimates.
The projections should be in profit & loss format. Explain assumptions
used if different from trend or industry standards and support your projected
figures with clear, documentable explanations.
Collateral: List real property and other
assets to be held as collateral. Basically, collateral is the bank's way
of ensuring that they will get something back from if you're unable to
pay back the loan. Few financial institutions will provide non-collateral
based loans. All loans should have at least two identifiable sources of
repayment. The first source is ordinarily cash flow generated from profitable
operations of the business. The second source is usually collateral pledged
to secure the loan.
Your bank is in business to make money.
Consequently, when a bank lends money it wants to ensure that it will be
paid back. The bank considers the 5 "C's" of Credit each time it makes
a loan.
Capacity to repay is the most critical
of the five factors. Capital is the money you personally have invested
in the business and is an indication of how much you will lose should the
business fail.
Collateral or guarantees are additional
forms of security you can provide the lender. If the business cannot repay
its loan, the bank wants to know there is a second source of repayment.
Conditions focus on the intended purpose of the loan. Character is the
personal impression you make on the potential lender or investor.
Frederic Madore is the founder of the Loan
Information Center. Get the best information about personal
loans and home loans.
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