Abdul Muhammed Law Practice
Abdul Muhammed Law Practice delves into the key aspects that banks consider when evaluating borrowers, including credit scores, financial statements, and risk evaluation.
When it comes to borrowing money from a bank, it is advantageous for a business person to understand the methods and criteria that Nigerian use to assess your creditworthiness.
Banks need to ensure that they lend money to individuals and businesses who are likely to repay the loan.
Credit scores give the initial impression
Credit scores are like your financial report card. They provide banks with a quick glimpse into your borrowing history and how you manage debt.
Credit scores are typically calculated by credit bureaus based on factors such as your payment history, amounts owed, length of credit history, types of credit used, and new credit accounts.
Banks use credit scores as an initial screening tool. A higher credit score suggests responsible financial behavior and increases your chances of getting approved for a loan with favorable terms.
On the other hand, a lower score might result in higher interest rates or even loan rejection. It’s important to review your credit report regularly, correct any errors, and work on improving your credit score if needed.
Financial statements paint a clear picture
Banks need to understand your financial health before lending you money. This is where financial statements come into play. Financial statements, including the balance sheet, income statement, and cash flow statement, provide a comprehensive view of your income, expenses, assets, and liabilities.
Balance sheet: This snapshot reveals what you own (assets) and what you owe (liabilities) at a specific point in time. It helps banks assess your net worth and financial stability.
Income statement: Also known as the profit and loss statement, this document details your revenues, expenses, and profits over a specific period.
It gives banks insights into your earning capacity and financial performance.
Cash flow statement: This statement tracks the inflow and outflow of cash over a period. It helps banks understand your cash management skills and whether you have the ability to repay the loan.
Digging deeper with risk evaluation
Banks perform a detailed risk assessment to gauge the likelihood of you repaying the loan. This involves evaluating both quantitative and qualitative factors:
Income and Debt Levels: Banks compare your income against your existing debt obligations. A higher income relative to debt increases your repayment capacity and enhances your creditworthiness.
Collateral: For secured loans, collateral such as real estate or vehicles is used as a backup if you fail to repay. Banks assess the value and quality of the collateral to determine the level of risk involved.
Loan Purpose: The reason for borrowing matters. A loan for a business expansion might be viewed differently than a personal vacation loan. Banks want to ensure that the loan will be used for a productive purpose.
