Things to Consider When Evaluating Loan Applications

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Table of Contents

Purpose
Summary
Discussion
Lenders’ considerations
The purpose of obtaining finance
Conclusion
Works Cited

Purpose

In light of the company’s financial plan and strategies, this report seeks to present information on areas of interest for lenders when considering loan applications from various institutions. The significance of this is to polish the organization to stand a chance of qualifying for loan consideration. The second purpose of this report is to act as a reminder on some of the reasons for obtaining financing.

Summary

The covered reasons for obtaining finance in this article are to finance working capital of an organization, to support an organization growth or business expansion and to facilitate capital expenditures. Other areas covered are areas of consideration by lenders. They are credit assessment, business assessment and capacity to pay back the loaned amount.

Discussion

In light of the current plan and long-term strategies of the organization, it is clear that more funds are needed. The organization’s internal source provides inadequate funds to completely facilitate the rolled out plans. Borrowing from external sources is the only sure way of funding the company’s projects.

Due to this reason, the company management needs to understand the perspective of the lender in order to successfully apply for funding. In addition, the management should re-examine their options by setting straight needs for funding.

The two articles, upon which the two concepts heavily rely, provide great insights into the matter at hand. They directly talk about how the company should go about borrowing a loan. Therefore, their context exactly fit into the company’s context and thus the reason for their selection.

Lenders’ considerations

Lending institutions can be commercial banks, hedge funds, Federal Reserve institutions, the World Bank and International Monetary fund. The lending process begins with an application made by a borrower to a lender. The lending institution, upon receiving the application, conducts an approval process to ascertain qualification of the borrower for loan consideration.

The main areas of concern are credit assessment, business assessment and capacity to pay. In credit assessment, the lending institution is interested in determining whether the borrowing entity has guarantors and if yes, whether the guarantors meet credit eligibility requirements, the current debt level of both the borrower and the guarantor.

A guarantor is the party to loan contract who is responsible for the full payment of the loan the amount in the event of failure on the part of the borrower. This information is important to provide an assurance to the lender that the lent amount will be recovered according to the terms of the contract.

The business assessment process involves ascertaining the feasibility of a project, whether the borrower is the manager of the project and whether the terms of the loan suit the purpose for which it is sought. This process helps the lender to avoid making investments in impractical projects. It also has connection with the assurance of recovering the lent amount.

During ability to pay the assessment, the lending institutions are interested in ascertaining whether the borrower will be able to pay back the loan by analyzing business financial information (“FHA Loan requirements: important FHA guidelines” par. 1-46).

The lending institution would be looking for the financial status and credit history of the lender. The lender is very much interested in the historical payment trend of a borrower because that signifies expected future payment behavior. A borrower with credit history characterized with continuous default in loan payment has a very slim chance of qualifying for a loan consideration.

In other words, a borrower with a good credit history has a good chance of loan approval whereas; a borrower with bad credit history stands a slim chance of loan approval. The lending organization would also be looking at the capacity of the borrower to repay the loan. The projected cash flow statement of a project will reflect the same. Another important area that should be given more weight is collateral.

An asset (fixed asset) serves as a secondary security for the loan. In case of default in loan repayment, the lender would recover the amount by liquidating the assets. The lender will also conduct an evaluation of whether the project to be funded meets all the applicable Federal, state and local planning, environmental and programming requirements. Following loan evaluation is the approval or rejection.

If the loan is approved, the parties sign the agreement document and the contract becomes legally binding. The last process is the disbursement of the amount requested to the borrower according to the arrangements (“FHA Loan requirements: important FHA guidelines” par. 1-46).

The purpose of obtaining finance

Companies obtain financing for the following reasons: to finance working capital, growth, expansion of businesses, obtaining of assets, seeking for an alternative source of finance and t acquisition of equity. Businesses borrow to finance working capital by investing in inventories and other working capital before revenues dues are collected from customers.

Companies can also borrow funds to manage the levels of growth. Return on equity analysis can be done on a company to ascertain the levels of the company growth without obtaining more external funding. When a company‘s growth rate is higher than it can manage, it needs to borrow from an external source to finance the growth. This is true because when a business is increasing its market coverage or opening up new subsidiaries in different locations, it will need substantial amount of funds.

These funds may not be available from the internal sources like retained earnings, and thus should be sought from the external sources and used to finance the growth activities of a Company. If a company cannot easily obtain funds from either internal or external source, it should control its growth activities to manageable levels (Peavler par. 3).

However, if a company’s growth levels are not managed, the result could be major business fallout. Expansion of a business is another issue that requires an external source of finance. Apart from seeking for external funds to finance a Company’s growth activity, it can be to finance a sudden Company expansion. The process needs a substantial amount of money that would not be available internally. This kind of investment decision is considered to increase the value of the acquiring firm.

A company could also borrow to finance acquisition of an asset or an equipment to facilitate its activities. Although there is another way of possessing an equipment- through leasing- though some companies do not prefer the process because it lowers a company’s credit rating. Companies have an indefinite life span. Shareholders, on the other hand, can change their shareholding positions in various companies. If a major shareholder in a Company (Peavler par. 4$5).

Conclusion

Borrowing from external sources is the fastest way to obtain large funds. It should be noted that it takes good reputation for borrowers to be funded. That is defaulters get no funds. There are various reasons for external borrowing. Businesses should align their borrowing objectives with key reasons for borrowing in order to survive strong competition.

Works Cited

FHA Loan requirements: important FHA guidelines. n.d. Web.

Peavler, Rosemary, Long-term and Intermediate-term Business Loans: debt financing for your business for capital needs. n.d. Web.

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