How do banks assess a business loan application? (2024)

Whether you're buying or expanding a new business, or looking to save money or negotiate better terms and conditions on your current business finance arrangements, the key to getting a better deal is as simple as thinking like a bank!

Banks lend money on a very basic premise – they want to be repaid and they want a return on their investment. Easy right? Well, theoretically yes, however the criteria the bank will use to assess your business credit risk can be extensive.

More importantly, unlike the relative standard terms of a home loan, the bank will allocate your business case with a risk grade which directly impacts the interest rate, fees, terms and conditions of your finance and, ultimately, the profitability of your business. The higher the bank perceives your risk, the higher the cost of your loan and vice-versa.

Traditionally, banks use loan assessment criteria known as the 5Cs to determine your ability to repay the loan:

1. Character: The credit history, business history, reputation and credit score of the borrower and the business.
2. Capacity: Your ability to service the loan from cash flow sources.
3. Capital: The equity or cash contribution you are making compared to the value of the business.
4. Collateral: The market value of the business and level of liquidity i.e., if cashflow came under pressure and you were unable to make your repayments what would the bank be likely to recover from the quick sale of the asset?
5. Conditions: The way the loan is priced and structured and any covenants put in place by the bank to protect its interests.

But wait, there’s more…

In more recent years, the 5Cs have been expanded to include more detailed quantitative and qualitative credit scoring frameworks. But here’s the kicker - while most lenders will utilise similar criteria to assess your loan application, each bank weights the criteria differently.

This means your risk grade can differ significantly from one bank to another, impacting the amount you can borrow, the conditions of your loan and more importantly, the cost of your finance.

Additionally, lenders don’t usually communicate the results of a risk assessment, which can put you on the back foot when it’s time to review existing terms or negotiate additional funding requirements.

This is where an experienced business finance broker adds significant value.

A broker with a proven track record in securing business finance can provide you with competitive offerings from a selection of banks or lenders, not just one or two. They will also have an excellent understanding of bank risk grade parameters and which bank or smaller lender will be able to offer more favourable conditions based on your business case.

Additional business loan requirements

The ultimate success and amount of time it will take to secure finance approval for your business, will be heavily impacted by the quality and detail of your loan submission. When considering your loan application, the bank may also require:

• Financial Statements

This will include income statements, balance sheets, and cash flow statements and projections. These statements provide a snapshot of the business's financial health, including its assets, liabilities, and cash flow. The information will be used to determine the business's profitability, liquidity, and ability to repay the loan.

• Management and Operational Capability

A detailed resume providing an overview of your experience and background and/or that of proposed business managers / staff, as well as details on organisational structure and business processes.

• Industry Analysis

The bank will conduct a review of the competition, market trends, and economic conditions that can impact the business's operations. Any additional information you can provide will be beneficial.

• Business Plan

The bank will assess your business plan to determine business viability. The business plan should include a detailed explanation of the business's objectives, target market, marketing strategy, competition, and financial projections. A well-crafted business plan will strengthen your business case and provide an indication of your commitment to the business.

While the level of detail required for a successful business loan application may seem overwhelming at first, remember you don’t need to go it alone.

An experienced business finance broker will be in the best position to help you co-ordinate the information and thoroughly package your loan application to meet the lender’s requirements. This will reduce the administrative burden, save you time and unnecessary stress, and increase the likelihood of a better finance package all-round.

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The information provided on this site is on the understanding that it is for illustrative and discussion purposes only. Whilst all care and attention is taken in its preparation, any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure its relevance to your specific personal and business requirements and circ*mstances.

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