Not everyone is credit-worthy enough to take out a loan. Sometimes, lenders have no choice but to turn applicants down.
This has been especially true in recent years. Thanks to the sluggish economy and a particularly difficult environment for small businesses, many banks have been reluctant to lend even to businesses that are stable.
A recent article on Inc.com seeks to explain some of the reasons why this occurs. Often, even a loan to a profitable business will require a bank to keep more money in reserve to cover the loan than it would otherwise wish to. For this reason, the bank becomes unwilling to issue the loan, even if it has good potential to make money.
That’s not the only way lenders have tightened their standards.
“Nowadays, banks are looking for a credit score of 720 or better,” Roberto Barragan, CEO of Aquaria Funds, told the news source. He added that while it is possible to get a loan with a lower score, anything below a 680 will lead to roadblocks. Some lenders will seek a larger deposit, for example.
Given that their money is on the line, lenders have every reason to be skeptical in this environment. Barragan offered some tips to business owners who may want to increase their chances at getting a loan. For example, he suggested that they be willing to put up collateral. In addition, he warned them against taking too many tax deductions when filing, lest they make it appear that they are unprofitable.
It is clear from this article that lenders need a fair and comprehensive method of determining who should receive a loan. The use of risk assessment tools can help with this process.