To resolve the financial disability, an SME may look for options to finance its various expenses. An SME would typically need money for:
- Asset acquisition
- Business expansion
- Working capital requirements
- Any other financing reasons depending upon circumstances.
Through this article, we will share 6 ways using which you can improve your chances of loan approval.
What are the ways to improve SME loan approval chances?
1. Build the Trust Bridge
2. Know the basic credit assessment criteria
3. Analysis of Bank Statement
4. Mitigate the bank’s risk and concerns
5. Attention to detail
6. Go to the company’s banker
1. Build the Trust Bridge
Establishing trust with your bank is the most important factor that helps in loan application a lot. Do not try to grind any information which is necessary for the banker to evaluate your loan application. Many small and medium businesses often do the mistake of covering up the facts and issues in business. If you are not open about the cash gaps your company is facing, how can you expect the company’s cash flow condition to recover?
2. Know the basic credit assessment criteria
Not every bank has the same credit evaluation criteria. Every bank largely follows its internal credit evaluation system most SMEs are not aware of. Moreover, SMEs do not generally have the resources to find out the bank’s criteria for credit evaluation . However, the loan applicant must know basic assessment factors every lender considers. If you know about the 5Cs of lending –the foundation of every credit assessment, you can highly improve your chances of getting a loan. The 5cs are – Capital Investment , Credit Character , Collateral or Pledge , Current Condition and Capacity of repayment.
3. Analysis of Bank Statement
It is mandatory to furnish the company’s bank statement while applying for a loan. The bank statement helps in giving the details of cash transactions for a specified period. Most banks require at least 6 months of bank statements to check business activities. Banks will typically perform the following assessment using the company’s bank statement .The bank statement contains your company’s name and the bank name using which you are conducting the company’s business. Also, it contains the registered email address of the company. This basic due diligence and standard checks all lenders perform to check the authenticity of the company’s business activities and its banker. Consistent and frequent deposits indicate that your company is operating profitably. It also shows that the company can generate revenue steadily and can collect from debtors on time.
4. Mitigate the bank’s risk and concerns
What does a bank want? It desires to know your plans and how are you going to repay its money. Having a business plan in place is a problem solver which includes almost everything such as business goals and vision, tools to execute such goals, timetable, and financial projections to assess the viability. Key man risk is another concern of the banks while issuing loans to SMEs. Many SMEs enter into the key man insurance agreement which means the business will continue even after abnormal incidents such as death, the retirement of one of the owners, and incapacity to operate. You must be ready with a risk mitigation plan to show banks that your business deserves the loan. The plan helps banks to give you preferences over other SME loan applicants.
5. Attention to detail
You may need the loan for different purposes such as purchasing equipment, working capital requirements, refinancing the existing credit, or business expansion. This is an inclusive list and hence, whatever your reason is for applying for an SME loan, you are supposed to discuss it in detail with the bank official. The official will analyze your profit assumptions whether they are realistic or not. For this, he will check whether you have used industry standards, and your actual profits both of past and present. In addition, he will also check your cash flow projects to assess if you are in a healthy cash flow position and able to pay the loan instalments.
6. Go to the company’s banker
If you are looking for a loan, it is first better to go to your current banker. The reason being the current banker already has the cash history and has a banking relationship with your company.
