10 Requirements for Bank Loan Approval – For potential borrowers, getting approved for a loan can be both exciting and scary at the same time. The term bank loan covers many different kinds of financial agreements, so it can be hard to figure out what you need to do to meet all the requirements for bank loan approval.
Fortunately, there are some basic requirements that most lenders look for in every applicant, making it easier to know where to focus your efforts in order to get the best chance of receiving that much-needed bank loan. You’ll have an easier time finding success if you understand these 10 common requirements for bank loan approval first.
1) A clear goal
Without a clear goal, it will be difficult to know how much money you need to borrow and what you will use the loan for. A common requirement for bank loan approval is having a clear goal.
You will also need to show that you have a plan for how the loan will help you reach your goal. This could include things like expanding your product line, hiring new staff, or opening a new location. The lender needs to feel confident that this additional funding will allow you to succeed in reaching your goal. If not, they might refuse the loan request outright.
2) Assets, not liabilities
In order to get a bank loan for your business, the bank will require that your business has more assets than liabilities. This means that your business must be making more money than it is spending. The bank will also want to see proof of this through financial statements. A good rule of thumb is that you should have at least one year’s worth of cash flow in the bank in case something goes wrong. If you don’t have an existing company with assets and current positive cash flow, you may need to borrow from family or friends until your company can sustain itself long enough to apply for a bank loan.
3) Debt-to-income ratio
One of the most important requirements for bank loan approval is your debt-to-income (DTI) ratio. This measures how much debt you have compared to your income and is used by lenders to determine how much you can afford to borrow. A DTI ratio of 43% or less is ideal, but some lenders may approve loans with ratios up to 50%. To calculate your DTI ratio, add up all of your monthly debts and divide that number by your gross monthly income.
4) Earn income from at least 2 sources
Before you even think about applying for a bank loan, your business must be generating income from at least two sources. This shows the bank that your business is stable and has a consistent cash flow. Bank Loans also require access to collateral. Bank loans are typically considered more risky than personal loans, so there are more requirements in place to protect both the bank and the borrower in case of default. The bank wants assurance that they will get their money back if something goes wrong with your business.
5) Strong credit score
A strong credit score is one of the most important requirements for bank loan approval. Lenders want to see that you’re a responsible borrower who pays your bills on time and doesn’t carry a lot of debt. A high credit score shows them that you’re likely to repay any money they lend you. Banks also look at how much income your business brings in, so having good cash flow is another requirement for bank loan approval. In addition, banks will also want to know what type of collateral you can offer as security in case you default on the loan. Lastly, some banks require entrepreneurs to have at least three years’ experience running their business before approving a bank loan application.
6) No recent or current bankruptcies or judgments
In order to get a bank loan, your business must not have filed for bankruptcy in the recent past, nor can you have any current judgments against your business. This shows the bank that you’re a low-risk investment and that you’re capable of repaying the loan.
Your business must be operational for at least six months (five sentences): The bank wants to see that your business is up and running smoothly before they invest any money into it.
7) Insurance coverage
If you’re looking to get a bank loan for your business, you’ll need to make sure you have the proper insurance coverage in place. This is one of the most common requirements for bank loan approval. Banks want to see that you’re prepared for the worst and that their investment is protected. The type and amount of insurance required will vary depending on the size and type of loan you’re applying for. But in general, you’ll need to have liability, property, and workers’ compensation insurance at a minimum.
8) Save money each month after expenses are met (savings account, rainy day fund, etc.)
Before you even think about applying for a bank loan, you should have some money saved up. This shows the bank that you’re responsible with your finances and can be trusted to repay the loan. Plus, it’s always good to have a savings account or rainy day fund in case of emergencies. Here are some tips on how to save money each month after expenses are met
9) Solid plan in place to repay the loan amount requested, including interest and fees. Can be written on paper, discussed with loan officer.
To get a bank loan for your business, you’ll need to have a solid plan in place to repay the loan amount requested, including interest and fees. This can be written on paper or discussed with your loan officer. Banks want to see that you’re not overextending yourself and that you know how much you’re borrowing will cost over time. You may also need additional documentation like bank statements, tax returns, financial statements, or credit reports if they are not included in your original application.
10) A positive relationship with your bank
Maintaining a positive relationship with your bank is essential if you want to get approved for a loan. Here are five ways to do so 1) Ensure that you have a checking account at the bank that has no overdrafts or holds. 2) Open an account with the bank and make sure it’s in good standing by paying all of your bills on time, maintaining low balances, and getting at least one check deposited every month. 3) Make sure the company’s name is registered as an official business entity, including ensuring that the paperwork is up-to-date. 4) Have financial statements ready for review. 5) Prove that there’s enough liquidity in the company’s bank accounts to cover any outstanding loans.