Three Tips From a Banker for Getting a Loan for Your Business

Three Tips From a Banker for Getting a Loan for Your Business

Be Sociable, Share! Tweet I’m a former Vice-President and Relationship Manager of a large international bank, and in my lifetime of reviewing loan applications I have found that most business owners are in the dark when it comes to understanding how banks make business lending credit decisions. Yet the answer is surprisingly simple. They want to be 99.5% sure that they will get paid back in full and on time. A bank typically only makes 3.4-3.75% on the money they lend your business. They have to pay depositors, other banks, or the federal government some percentage annually for the use of the money they lend to you. All but the largest banks price their loans by taking the interest they pay to borrow the money they are going to loan to you, and add 3.4-3.75 percentage points onto it. That is how they calculate the interest rate on your loan. Larger banks use a more complicated formula. However, the margin between what the money cost them, and what they charge you, is the gross profit on the loan. And out of that they must pay all the expenses associated with monitoring and servicing the loan. No wonder banks are so skittish when lending to a business. 99.5% of the time they have to be right about whether they will be paid back by their customers in order to make their planned return. And part of that is not only whether they will be paid back in full and on time, but what can they do if they aren’t? Most banks like to see three sources of repayment, and more...
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