What makes banks and other financial institutions choose which customers to lend money to? There are many factors to consider, but there is one main factor that helps lenders decide who to lend to: risk. A bank that lends to a customer will want to know that there is a strong chance the money will be repaid. The process of approving a loan requires the bank to consider hard assets. Bankers examine the customer’s accounts carefully in order to minimize risk. They will often only accept a small portion of risk, especially when lending large amounts of money. They will also apply KYC processes. Find out more at w2globaldata.com/regulatory-compliance-solutions-and-software/know-your-customer
During a credit crunch, banks will tend to be more selective when it comes to lending to businesses and personal customers. This is due in part to the fact that the banks may be experiencing a credit supply shock. When this happens, they’ll cherry-pick the loans they lend out and refuse to lend to others. This practice has led to widespread criticism of banks and suggests practical solutions to protect against the credit crunch.
A lender will also consider a business owner’s personal finances. Typically, business owners with a significant amount of personal capital are more likely to repay their loan. Banks will look at a business’s free cash flow and debt-to-income ratio as a way of determining whether a business is likely to succeed. The banker will also look at other factors that are outside the business owner’s control, such as industry trends and the direction of politics.