Banks are in the business of making money. They borrow money from investors to invest in additional money making opportunities. However, the success of a bank requires that the bank make good financial decisions. Good financial decisions mean careful consideration of loan requests. Providing a loan to someone who is likely to be unable to pay or for an unsuccessful business idea can harm the bank. Too many poor loan decisions can put a bank out of business. As a banker, you are an important part of making these smart financial decisions.
Follow all guidelines
As a loan provider, you are trained with specific guidelines in place. These guidelines may include requiring business valuation appraisals for business loans or requesting specific documents for mortgage loans. Following these guidelines to the most specific of regulations can improve the decision making process. It can take a lot of the guess work out of how profitable a business will be or if a house is really worth the asking price. Approximately only 47% of people in the U.S. trust their bank. A lot of this distrust is due to the blurred lines in loan approvals.
Request a double look
While a business loan may seem profitable to you at first, you may miss an important piece of the company valuation. Also, the specific method used may affect your decision making ability. Determining the value of a business is usually decided using one of these three approaches, by comparing to recent sales of similar businesses, based on the business? earning power and risk assessment, and based on the company?s assets. Always sending your loan request to another loan banker can help you identify problems. It can help you make better loan decisions.
Use trusted small business valuation resources
It is likely that many business loan applications will come across your desk that you are not familiar with. You may receive an application to purchase a coffee shop, even if you do not drink coffee. You might receive an application to open a night club in a city that you are not familiar with. Lack of knowledge can make it difficult to create an accurate business valuation appraisal. Using an outsourced and professional business valuation firm can complete the accurate business valuation appraisal for you.
Compare to previous sales
It is also likely that you will see similar loan applications throughout your loan work. If you previously issued a loan payment to a business in a specific amount and then receive a much higher loan request on a similar business, carefully identify the differences. It is possible that one of the loans is improperly calculated. Although professional real estate agents are generally responsible for the comparative information, keeping track of your own comparisons can be helpful in your loan decisions.
Evaluate the entire loan application
Sometimes, the business valuation appraisal is not enough to make an educated response. You often have to take into accounts other aspects of the business sale, including the reason for selling, the experience of the buyer, and the intent of the buyer. These psychological and emotional factors do affect the price and value of the business purchase. Looking through previous business records can help understand the seller intent. Looking at the buyer?s previous work experience can help evaluate probability of business knowledge and success. Small business valuations must be used in addition to all aspects of the buying and selling process.
In 1980, 60% of people in the U.S. had confidence in their bank. Since then, trust and confidence levels have severely decreased. There were little requirements when it came to giving loans. Many people lost their homes and their businesses as a result. This put a huge struggle on the country financially. As a bank lender, it is your responsibility to prevent this from happening again. A careful decision making process should accompany every single loan application. It should include a mix of experience, knowledge, the business valuation appraisal, and following specific lending regulations.