An individual’s financial capacity to make good on a debt is one key area every lender (banker) wants to be sure is safe in the bag before any loan gets approved. This makes Capacity as important as the other factors in the lending circle (5 C’s of lending).
As a business, having capacity to repay a loan is the ability of the business to generate revenue to pay back the loan. The banker’s first interest is in a business that can show positive cash flow (where the income of the business exceeds the expenses incurred), and this cash flow has to be sustained over time to stand a good chance of getting that loan. This is why Bizintelng emphasized that it’s a bad idea to start up a business from a loan. Why? Because your business is new and has no credit history, it’s so risky that the chances of being considered by any banker for a loan slim.
To assure your banker your business can repay that loan, you should know and have the following in mind:
- Your banker assesses your ability to repay your loan using your debt-to-income (DTI) ratio (your debt compared to your income) and your best bet of impressing your banker is if the ratios are low, your banker becomes relaxed that the loans are going into a safe hand.
- The viability of a business is measured by its survival and sustenance of profits over a period of time. The longer you can keep your business profitable, the better the viability of that business and the better look it gives your business to your bankers. You demonstrate this by making profits year after year.
- Your banker also assesses your capacity based on your monthly disposable or surplus income. The main focus of your banker is to ensure that you comfortably repay the loan as at when due. Trick is, the higher your monthly disposable income, the higher the amount your banker would be willing to entrust to you.
- Repayment capacity measures your ability to repay the loan from your regular income. Now this means that for every loan you seek, it is expected that the repayment or servicing of that loan comes from the business proceeds (profits) not the capital of the business.
Every business has a repayment capacity. And how is this ascertained? By ensuring that the debt service requirements do not exceed the debt repayment capacity, if it does, then the business is headed for stormy waters it may never recover from. Bankers really wants to ensure that your business have the ability to repay a loan, to avoid loan repayment default. Unfortunately, amount of bad loans in Nigeria is very high.
So as a business owner, take deep interest in knowing about the health status (capacity) of your business at all times and that’s why you have Bizintelng a click away!
At Bizintelng, we provide advice to businesses, particularly, on applying for a loan.