I received a query from a reader asking me this frequently asked question. As what I have said before, the decision to extend credit/ loan to a borrower will be firmed up when the loan or credit officer is satisfied on the following considerations:
First, 5 C’s evaluation. If the results of analysis are favorable about the borrower’s character, capacity, capital, collateral and conditions, then this is good indicator that the loan might be granted. Creditors always use these basic 5 C’s of credit as yardsticks. These 5 C’s must be found satisfactory based on the completed evaluation of borrower’s past financial/ income statements, e.g., balance sheet, profit and loss statement, cash flow, quality of management; credit investigation reports depicting credit performance; among others.
Second, purpose of loan. The creditor always satisfies itself that the essential requirement for financing the year’s operations are provided for before extending credit for needs or wants. “Needs” are ordinary expenses, while not direct costs of operation, which must be paid ultimately from operation income. Taxes, interest, and some repairs are examples. “Wants” refer to those things, which the applicant can get along without and which do not contribute directly to the profitableness of the business. It is an SOP for lending officers to be thoroughly acquainted with the type of business for which financing is requested, develop facts which will enable them to arrive at correct decisions, and loan officers always put premium and give very careful consideration to the purpose/s for which credit is extended.
Third, amount of loan. Another prime consideration in determining the amount that can be soundly extended is to provide the credit necessary to carry the business operation to a successful conclusion. The credit limit is kept in proper relationship to the strength of the credit factors and permit orderly liquidation from normal operating income. If the minimum amount necessary for the borrower to operate properly is greater than the projected income, the credit request would normally be declined. An expectation of a business will serve that best interest of the borrower as well as the creditor.
Fourth, plan of repayment. Creditors always incorporate a complete and acceptable plan of repayment, which shows clearly the manner in which each loan is to be liquidated. The plan of liquidation is based upon the repayment capacity of the borrower’s business and conform to the general credit policies with respect to the type of loan involved. It is important for creditors to plan repayments so that the borrower can meet them in the course of his normal business operations.
Loan Collateral. This is always, the last to be considered. Creditors are flexible enough to vary its collateral requirements in line with sound business practices. A morally responsible borrower with strong financial strength in relation to the line of credit, and a well-established, stable business, which assures a satisfactory margin of income over all expenses may be extended credit on clean basis. Collateral requirement are imposed as the risk increases.
So overall, it could be one or a combination of these, that a loan application gets disapproved.
For credit & collection questions and inquiries, call or text at 0917-7220521 or email him at elimtingco@cibi.net.ph