Factors granting long-term loan

Ability to repay

First, lender must consider whether the company can paid back the loan. So, lender want to see two sources of repayment which is cashflow from the business, plus a secondary source such as collateral. In order to analyze the cash flow of the business, the lender will review the business past financial statements. Generally, lender feel most comfortable dealing with a business that has been in existence for a number of years because they have a financial track record. If the business has consistently made a profit and that profit can cover the payment of additional debt, then it is likely that the loan will be approved. If however, the business has been operating marginally and now has a new opportunity to grow or if that business is a start-up, then it is necessary to prepare a thorough loan package with detailed explanation addressing how the business will be able to repay the loan.

Experience

When a person that wants to open a business and has no experience in that business should not seek financing let alone start the business unless they intend to hire people who know the business or take on a partner that has the appropriate experience. Regardless, the person should be advised to take some time to work in the business first and take some entrepreneurial training classes.

Purpose of the loan

One of the first things a lender will determine when a business requests a loan is whether is use for run the business or personal use. If the loan is use for personal use, it is very dangerous borrow to the company. But it use for run the business or expand the business, it still can consider borrow to the company.

Equity

Lender want to see a certain amount of equity in a business. Equity can be built up in a business through retained earnings or the injection of cash from either the owner or investors. Most lender want to see that the total liabilities or debt of a business.

Collateral

Financial institutions are looking for a second source of repayment, which often is collateral. Collateral are those personal and business assets that can be sold to pay back the loan. Every loan program, even many microloan programs, requires at least some collateral to secure a loan. If a potential borrower has no collateral to secure a loan, she or he will need a co-signer that has collateral to pledge. Otherwise it may be difficult to obtain a loan.

  1. Anon. 2007. Key points to consider when borrowing money. [online]. FindLaw. Available from the World Wide Web: URL: http://practice.findlaw.com/law-practice-management-articles/00043/000048.html. [Accessed 28 October 2009]
  2. Anon. 2007. Key points to consider when borrowing money. [online]. FindLaw. Available from the World Wide Web: URL: http://practice.findlaw.com/law-practice-management-articles/00043/000048.html. [Accessed 28 October 2009]
  3. Anon. 2007. Key points to consider when borrowing money. [online]. FindLaw. Available from the World Wide Web: URL: http://practice.findlaw.com/law-practice-management-articles/00043/000048.html. [Accessed 28 October 2009]
  4. Anon. 2007. Key points to consider when borrowing money. [online]. FindLaw. Available from the World Wide Web: URL: http://practice.findlaw.com/law-practice-management-articles/00043/000048.html. [Accessed 28 October 2009]

Please be aware that the free essay that you were just reading was not written by us. This essay, and all of the others available to view on the website, were provided to us by students in exchange for services that we offer. This relationship helps our students to get an even better deal while also contributing to the biggest free essay resource in the UK!