Bank loans are highly structured. A bank won’t lend you willingly because it has enough money. It will only do so if all the elements of trust are in place. And, to be convinced, the bank will require you to provide a set of documents that attest that you will be able to repay the said loan. So, what is she looking at? We’ll tell you all about it!
One of the most important steps in funding a business project is getting a business loan. Banks look at a number of factors in order to grant credit. They examine the project that is being offered, solvency, self-financing ability, and reimbursement guarantees. Other decisive factors are the loan terms and interest rate. Together, let’s ascertain what criteria banks use especially to approve business loans.
What is bank financing?
Bank financing is an essential lever for business development. With this financing, a company will be able to operate all its structures such as (paying employees, buying logistics, paying suppliers, settling service providers’ accounts, paying various invoices, managing unforeseen events, etc.). And, in order to get that bank financing or loan, you definitely need to understand how the banking ecosystem works. This is because banks, as financial institutions, seek to minimize risk while maximizing their return on investment.That’s why they have set up rigorous criteria to evaluate business loan applications. These criteria typically vary depending on the type of loan, the company’s financial situation, and its industry. In addition to these evaluation elements, banks will also study, in particular, the business plan, the solvency of the company, and the ability to repay the loan.
What is the role of the company in obtaining a bank loan?
Your role in securing the right loan is extremely important. Because, a small loophole can eventually cancel the loan or even reject your application file. In fact, it is your company’s financial situation, your business strategy and your governance that will be evaluated first and foremost by the bank.
- Therefore, your company must be in solid financial health, with sufficient profitability and equity.
- Your strategy should be realistic and promising, demonstrating the ability to generate sufficient income to repay the loan.
- Finally, your quality of management will also be scrutinized. Normally, a good manager must be able to manage his company and above all to make the appropriate decisions to ensure its sustainability over time.
it is therefore essential to prepare your file well by highlighting these elements to maximize your chances of obtaining a loan.
The bank’s evaluation criteria
The bank’s assessment for granting a business loan is based on several decisive criteria already mentioned in the introduction. It is the ability to repay that is considered to be the very first criterion for evaluation. It is based on the company’s financial health, projected cash flows, as well as the current level of debt. In addition, your profile as an entrepreneur or manager is also scrutinized with a fine-tooth comb. These include your experience, education, and management skills. Also, the bank pays particular attention to the business plan presented: the quality of the project, its projected profitability, the adequacy between the financing requested and the needs of the company are all points scrutinized.Finally, your financial situation as well as the quality of the guarantees provided to secure the loan are also important evaluation criteria. They must provide sufficient insurance to the bank in the event of default by the borrower.
The self-financing capacity of the company
The company’s cash flow is a major indicator for banks when evaluating a business loan. It is the internal resource released by the company’s own activity. In other words, the CAF represents the funds that the company is able to generate through its ongoing activity, and that can be used to self-finance new investments or to repay outstanding loans. Banks use the CAF to calculate the repayment capacity of the loan and indirectly assess your borrowing capacity. In general, they prefer that the ratio of financial debts to CAF does not exceed 2 to 3, in order to guarantee a quick repayment of the loan. In short, a good cash flow is a sign of a solid and profitable business, capable of generating enough profits to finance its expenses and pay off its debts.
Analysis of the project presented
Based on the project presented, the bank carries out a detailed analysis to assess the suitability of the business loan. This analysis focuses in particular on the originality of the project and its viability on the market. A structured business plan is therefore essential, it should include in-depth market research and a realistic strategy. It is also important that the project is in line with the experience and skills of the project leader. Banks pay particular attention to projects in the innovation sector, which often have a higher level of risk. A sensitivity analysis of the project is then carried out to assess potential risks. Finally, the bank examines the conditions for the entry into force of the loan and the fundamental economic policy issues related to the project.
Money back guarantees
To secure the repayment of the business loan, banks will require guarantees. So, it is important to know that these guarantees, called “securities”, allow the lending institution to ensure that the loan is properly repaid in the event of default by the borrowing professional. Several types of guarantees can be put in place for this purpose:
- Mortgages: this mainly concerns real estate financing. This involves the bank taking a property as collateral.
- Pledge: this is the pledging of movable (intangible) property in the form of a pledge or pledge.
- The guarantor: given by one or more natural persons, it represents one of the possible credit guarantees, in the same way as security interests.
- The counter-guarantee: this is generally requested when buying or taking over a business.
It is also possible to carry out a professional loan insurance delegation to choose the guarantees adapted to your needs.
The solvency of the company
The creditworthiness of the company is a key factor for banks when granting a business loan. It represents the company’s ability to honour its debts in the short, medium and long term. To assess it, banks use several financial ratios such as the debt ratio, the gross operating surplus or the working capital. It is essential for a company to maintain a healthy solvency to reassure banks about its ability to repay the loan. Otherwise, the company could be denied financing or receive a higher interest rate. Banks will also consider financial evidence such as:
- The balance sheet,
- The income statement,
- The business plan including the forecast balance sheet.
These documents will allow the bank to conduct an in-depth study of the company’s financial situation and thus determine its solvency.
The professional credit rate
The business loan rate is a determining factor in the overall cost of your loan. It varies according to several elements: the duration of the loan, the amount borrowed, the solvency of the company and the guarantees provided. According to the Banque de France, the average interest rates observed for the different types of loans are as follows:
- Overdrafts: 2.89%
- Cash flow (average term of 23 months): 1.56%
- Equipment financing (average loan term of 119 months): 1.72%
It is also possible to use a broker to negotiate the rate of your business loan. Platforms exist for this purpose and can help you compare different offers and choose the offer that best suits your needs. There are several types of interest rates for business loans:
- The nominal rate, which is the base rate of the loan, excluding insurance and ancillary costs.
- The APR (Annual Percentage Rate), which includes all the costs related to the loan (application fees, death and disability insurance, other costs).
It is essential to understand these different rates to choose the most advantageous loan offer.
Conditions for obtaining a professional bank loan
To get a business bank loan, there are some specific conditions that must be met.
- Creditor insurance: The company must choose between creditor insurance or an individual contract. The insurance contract can be provided by the bank granting the loan.
- Presentation of specific documents: To obtain a business loan, documents such as the company’s Kbis, your identity card, a financial forecast justifying your loan, your proof of address, your bank statements, must be provided to your banker.
- The company’s situation: A business loan is exclusively reserved for legal entities (companies) or natural persons exercising a self-employed professional activity (sole proprietorships).
- The purpose of the loan: The business loan is a financing requested by a company for various reasons, the development of a business, the need for cash to get back afloat or launch a new project.
The personal contribution of the entrepreneur
The entrepreneur’s personal contribution is a key factor in obtaining a business loan. It attests to the entrepreneur’s involvement in his project and reassures the bank of his motivation.
The importance of personal contribution:
- It increases the chances of getting a loan because it reduces the amount to borrow and therefore the risk for the bank.
- It can help negotiate a better interest rate.
- It demonstrates the entrepreneur’s ability to save and manage their finances.
The amount of the personal contribution:
- It usually varies between 10 and 30% of the total project amount.
- However, in some cases, a personal contribution may not be necessary, especially for business development projects.
It is possible to increase your personal contribution through different solutions such as the loan on honor or microcredit.
Presentation of the commercial project
To get a business loan, the presentation of the business project is crucial. It allows the bank to assess the viability of the business and its ability to generate future profits. This project must be clear, well-written and comprehensive. It should include:
- A detailed description of the company and its activity.
- Short-term and long-term business goals.
- Market research showing demand for the company’s product or service.
- A marketing and sales plan detailing how the company plans to achieve its goals.
It is essential that the contractor has a thorough understanding of the project and is able to answer the bank’s questions in a convincing manner.
Study of the company’s financial plan
Studying the company’s financial plan is a crucial step for banks when evaluating a business loan. Banks shall analyse the [financing plan], the [projected balance sheet] and the [cash flow] forecasts to determine the financial health of the undertaking.
- The financing plan helps identify the company’s financial needs and sources of funding, which can include capital contributions, loans, and crowdfunding funds.
- The projected balance sheet provides a projection of the company’s assets, liabilities, and equity over a given period.
- Finally, the cash flow plan estimates the company’s revenues and expenses over a set period of time.
The company must also provide accurate information about its expenses and income to help the bank assess its ability to repay the loan. These documents must be reliable, up-to-date and self-explanatory to facilitate the bank’s review of the application.
How to convince the bank to obtain a loan?
Convincing a bank to obtain a business loan requires proving the financial and strategic viability of your project. Here are some tips on how to do this:
- Rigorous preparation of the file: A well-prepared file testifies to your seriousness and professionalism. This should include documents such as:
- A detailed business plan
- Financial statements for the last few years (if any)
- Financial Forecasts
- Commercial contracts signed and firm orders
- Consistency of the project with your background: It is vital to show the coherence between your project and your career path. This reassures the bank that you will be able to complete the project.
- Personal contribution: A significant personal contribution is often a sign of your commitment to your project. The higher your down payment, the more likely you are to convince the bank.
- Neat presentation: A neat presentation of the project and yourself can tip the scales in your favor. You have to show your motivation and determination.
- Comparison of banking offers: It is essential to compare the offers of several banks to choose the one that offers you the best conditions. It also shows your bank that you are active and determined.
- Anticipating questions: Be prepared to answer any questions the bank may ask. The more accurately and quickly you are able to answer their questions, the more credibility you will gain.
- Following these tips can increase your chances of getting a business loan.
Apply for and obtain the loan online
Applying for a business loan online is a quick and convenient solution to get financing for your business. The application steps are generally as follows:
- Choice of loan offer: Compare the online business loan offers of different banks to choose the one that best suits your needs.
- Filling out the online application form: You will need to provide some information about your business, your project, and your financial situation.
- Sending the necessary documents: Most banks ask to see your business plan, annual accounts, and other supporting documents.
- Analysis of your application: Once your application has been received, the bank analyzes it to assess your ability to repay.
- Bank’s response: If your application is accepted, you will receive a loan offer to sign and return to the bank.
It should be noted that each bank has its own criteria for granting a business loan online. It is therefore crucial to be well informed about these criteria before making your application.
The real estate loan for professionals
The home loan for professionals is specifically designed to cover the real estate needs of businesses. Whether it is for the acquisition, construction or fitting out of business premises, this type of loan offers a financing solution adapted to the specificities of the professional activity. It works in a similar way to a classic home loan, but has some peculiarities. For example, the award criteria take into account the financial stability of the company, its seniority (at least three years of existence is generally required) and the quality of the real estate project presented to the financial institution.
In addition, the interest rate applied can vary depending on these criteria, and a solid guarantee (business, guarantee, etc.) is often necessary to secure the transaction. Finally, the choice between creditor insurance or an individual contract is something to consider, as it can influence the terms of the loan.
Specific conditions for professional real estate loans
As with individuals, the mortgage rate for professionals varies according to many criteria. It is important to note that this rate can be both fixed or variable. In addition, the interest rate can be influenced by:
- The duration of the loan
- The amount of the loan
- The company’s financial situation
- Guarantees provided by the company
It is therefore crucial to carefully consider these factors before choosing the most advantageous offer.
The real estate loan rate for professionals
According to recent data, the mortgage rate for professionals usually fluctuates between 2% and 6.5%. This rate is slightly higher than that offered to individuals, with a difference of +0.2 to +0.4% on average. However, these figures are only averages and may vary depending on several factors:
- The creditworthiness of the business: A company with good financial health is more likely to get a favorable borrowing rate.
- The quality of the real estate project: A well-structured and viable project can contribute to a lower borrowing rate.
- The term of the loan: The longer the term of the loan, the higher the borrowing rate can be.
It is recommended that you use a professional loan simulator to evaluate the amount, term, rate and monthly payments that are best suited to your needs.