If you have made the decision to raise finance for your business in your personal capacity, then it is important to understand the criteria used by lenders to assess the application.
These are the main areas they check:
- A clean credit record.
- A steady income.
- Whether you can afford the repayments.
- Your personal assets and liabilities including details of any personal surety you may have signed in the past.
Your credit report contains a wealth of information about your financial actions and it is one of the first checks that lenders look for. The credit record shows a history of the type of accounts you have and how you pay them. Lenders are particularly interested in your payment history as this shows whether you take responsibility for your debts.
Understanding your credit report can be confusing, especially if you’re reading it for the first time.
Here is a breakdown of the types of information contained in your report:
- Personal information including your name, address, and place of employment is used to identify you. Previous addresses and places of employment might also be included.
- It’s not uncommon to have variations or misspellings of your name. Most credit reporting agencies leave these variations to maintain the link between your identity and the credit information. Having different variations of your name and old addresses won't hurt your credit score as long as it's actually your information. Make sure personal information is identifying you and not someone else.
- The account history section of your credit report contains the bulk of the information. This section includes each of your credit accounts and details about how you've paid. Your account history will be very detailed, but it's important that you read through to make sure the information is being reported correctly. Each account will contain several pieces of information.
- Name of the institution providing the information.
- Account number associated with the account. The account number may be scrambled or shortened for privacy purposes.
- Account type i.e. revolving account, education loan, auto loan.
- Responsibility. This indicates whether you have individual, joint, or authorised user responsibility for the account.
- Monthly payment requirements.This is the minimum amount you are required to pay on the account each month.
- Date opened. The month and year the account was established.
- Public records include information like bankruptcies, judgments, tax liens, state and country court records, and, in some states, overdue child support. Depending on the type of account, a public record can remain on your credit report between 7 to 10 years. Only severe financial blunders appear in this section, not criminal arrests or convictions. Because public records can severely damage your credit, it's best to keep this section clear.
- Credit inquiries list all parties who have accessed your credit report within the past two years. While your version of the credit report lists several credit inquiries, not all of these appear on the lenders' and creditors' versions. Only "hard" inquiries are shown to lenders. These are inquiries made when a lender checks your credit report to approve your credit application. Your version will also include "soft" inquiries consisting of inquiries made by lenders for promotional purposes.
It is a good idea to regularly check your credit record. You want to ensure it is up to date and accurately reflects your credit track record. Not only will this help you to make better-informed decisions when you apply for credit, but it will also identify if you are a victim of identity theft. If you spot accounts you know that you haven't opened, this is a potential identify theft issue and you need to instantly report it.
Experian and TransUnion are two of the largest suppliers of credit records. Click on the links to find out how to apply for your free report.
A steady income
From the lenders point of view, anyone earning a steady income is a better loan prospect that someone who only earns money erratically. This is one of the key reasons why entrepreneurs are encouraged to pay themselves a salary as soon as the business is generating sufficient money.
Lenders are nervous of people who can only show an erratic income pattern. If they do decide to approve a loan to someone not earning a salary, they are likely to significantly increase the amount of collateral required to make sure they can recover the loan and interest monies.
The National Credit Act (NCA) forces lenders to check that the loan applicant has sufficient money to repay the loan. They will request that you complete an income and expenses document. This is usually done together with the lender who checks expenses against your bank statements to make sure that all deductions are included. They are looking to see whether you have sufficient surplus cash at the end of each month to repay the loan. If you don’t, your loan application is likely to be refused.
Statement of assets and liabilities
A statement of assets and liabilities literally lists items that you own (of a capital nature such as house, car, other property etc.) and what you owe (bond, car finance etc.) It also includes a list of any personal sureties you have already signed.
This is important for lenders as if you were intending to use your home as surety for the loan, they want to check that you haven’t already signed surety for previous loans. If this is the case, they are unlikely to consider the loan application.
Once again you need to keep detailed records of personal sureties you have signed, repayments you have made and the cancellation of the surety if the loan has been paid off. This is critical information that can help you access finance as you can provide to the lender that the debt has been repaid and the surety cancelled.
There are a host of small micro finance companies willing to loan money without asking too many questions. Two things are worth checking if you are considering using a smaller lender:
- The interest rate that will be charged.
- Whether they require an upfront payment before granting the loan.
Smaller lenders are often willing to take bigger risks and as a result charge significantly higher interest rates than the larger finance organisations. This is how they manage to keep their businesses going.
However, beware of companies that require you to pay an upfront fee before they will finalise the loan. Loan administration fees are not uncommon, however this fee usually forms part of the loan itself. So before you pay any money, check the organisation’s registration with the Companies and Intellectual Property Commission (CIPC), the National Credit Regulator (NCR) and the Finance Services Board (FSB). The finance industry is heavily regulated and you must check that the company has registered as required by law. If you cannot find their details on these sites, don’t do business with the company.
Preparation for a loan application
Gathering the following documents before the application can save time.
You will need:
- ID book.
- Company payslips (for the last few months is preferable).
- Bank statements for the past three months.
- Detailed income and expenses (to show you have sufficient money left over to repay the loan).
- Proof of residential address (your latest municipal bill will do).
- Credit record (if you have one, otherwise apply for it using your free access).
- Statement of assets and liabilities.
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