How banks make lending decisions

A guide about the areas banks look at when they're deciding whether to fund your business.

Will my bank give me a loan?

Watch our video to hear from our finance expert, Yvonne McLaren-Robertson, as she explains how banks make lending decisions.

If you’re trying to decide what type of finance would suit your business, you might think of debt funding. If so, you'll probably want to know if you would be accepted for debt financing by a bank.

The first thing any bank or lender will do, is work out the suitability of your business for finance. They'll want to determine if you’ll be able to repay the amount you borrow (the principal) with the interest they charge within a reasonable length of time.

A potential lender will use a wide variety of factors to assess your creditworthiness. The bank will also use a more specific set of factors. There are factors they are required to think about because of law and regulation, while other factors are used as part of their own policies.

A bank’s decision to give you funding will depend on the following areas:

Your profit and cashflow

The bank will want to know that you will be able to repay what you borrow and interest within the agreed timeframe. Therefore you'll need to provide historical (where this is relevant) and projected financial information that demonstrates profitability and cash generation. This information should support your loan application.

Ensure that your financial forecasts are backed-up predictions (assumptions) supported by your financial information.

The bank is likely to challenge you on how you think your business will grow with the funding they give you.

What security is available?

You'll need to pledge something as security for the loan, which is known as collateral.

Common forms of security include:

  • Real estate
  • Vehicles
  • Equipment
  • Inventory, structures and circumstances
  • Accounts receivable (your trade debtors)

The bank may also ask you to provide a personal guarantee as additional security.

What will the loan be used for?

The bank will want to understand the market conditions that affect your business.

The banks appetite to lend will vary from sector to sector depending on their particular risk policies.

It's always worth finding out a bank's particular risk appetite for your sector before approaching them for loan.

If your business would not match their risk appetite you should approach other banks and alternative lenders.

Your personal credit assets

A bank can consider your personal finances using character and your property/assets to secure the loan (collateral).

If you have a poor personal credit history, the bank might think it’s possible your business could have similar problems.

Collateral

If the bank decides that your business doesn’t have adequate collateral to secure the loan, they may want your personal assets as collateral. As a minimum they may ask for a personal guarantee.

It's worth bearing in mind that if you fall short on only one criteria, your application may still be rejected. Therefore, it's important that you submit a clear and strong proposal to a bank or alternative lender who will likely look for the same information.

Enterprise Finance Guarantee

Even if you have a valid business proposal, the bank may decide not to support you if there is not enough security available. To support such businesses, the UK Government has introduced a scheme called the Enterprise Finance Guarantee (EFG).

For businesses that have a good model but insufficient security, the Government will provide a guarantee to the bank to cover some of the loan. The bank still makes the decision to lend you money but the Government pays some of the cost if you cannot repay.

If your business’ loan is secured using an EFG you will end up paying a fee to the government on top of interest to the bank.

Find out if the EFG scheme would suit your business on the British Business Bank website

Got a question about accessing finance?

Get in touch with our team of experienced financial readiness experts who can help you secure funding from a range of sources including bank funding, equity funding, and grants.

Disclaimer

This guide was written by our investment team at the Scottish Investment Bank who work with Scottish businesses and UK and international investors.