Sunday, September 9, 2012

Requirements When Applying a Bank Loan

Why is it that the Financial statement of the borrower and his monthly net income statement are the most important documents that the bank should look at before considering the loan for approval?

The data recorded on those documents are the souls of the borrower. The bank will determine the overall capacity or the ability of the borrower to pay the loan base from those records. And before the loan is approved - the bank will send off or assigned a representative to investigate the borrower's true identification. A person from the bank will visit the applicant's address and location to make sure that what the applicants recorded on his application letter are true and correct.

Loan (Photo credit: Philip Taylor PT)

In writing a loan application - it is not necessarily to use erudite language instead, use simple language. Below is an example of the contents of the application letter I wrote that says: (here I am just talking about contents of the said application, I used my own identity as sample).

I am Paul O. Pruel, a Filipino national and of legal age. I am an overseas Filipino worker and a resident of Barangay Capipisa, Tanza, Cavite, Philippines for about 26 years on. I am married to Imelda Duria BacoIod - who is also a resident of Barangay Capipisa, Tanza, Cavite. We have three children - all girls ages: 22, 20 and 19. I would like to apply for a cash loan worth of Five Hundred Thousand pesos (500,000 ph). The money will be used to establish a new family business which is about Fishing boat's parts, accessories and other fishing supplies.

If permitted by the bank, I would like to pay this loan plus the incurred interests by installment basis and for the period of five years or as per your bank allowable time and period to pay such a loan. My net monthly income is amounting to Thirty-Eight Thousand Six Hundred Five pesos (38, 605 ph) as per the attached records of my Monthly Net Income Statement.

I have been working as an OFW with the company Saudi International Trading and Marketing Limited (SITML) from 1994 to present. And so far, I have no bad records with this company. Also I have no loan made yet to any banks and other lending companies.

If the bank will determine the nature of the contents of the above loan application letter, the bank will find the following:
  • First paragraph contains the name of the borrower, his true contact address and location, his status, number of children, the amount to borrow and his purpose why he will borrow.
  • Second paragraph contains his promise and the period to pay and his net monthly income.
  • Third paragraph contains about records of his personal characteristics and other good traits.

How about the borrower's balance sheet? What to see on his balance sheet? Below is a sample of a simple balance sheet I prepared for myself as I pretended as the borrower. However, some borrowers hired accountants to prepare them but if the borrower can do it by himself, it is better. On his balance sheet all his assets and other properties should be declared including liabilities and his equity or net worth.

Balance Sheet For the month ended 31 August 2012

  • Cash in Bank - 40, 000
  • Cash on Hand - 30, 000
  • House and Lot - 350, 000
  • Tricycle - 90, 000
  • Fishing boat - 300, 000

Total Assets: 810, 000

  • SSS Salary Loan - (6, 000)

Total Liabilities: (6, 000)

Total Owner's Equity: 804, 000

On the borrower's income statement - he should include all the income sources from his monthly salary, income from his other properties or income from his existing business if he has. In income statement, the borrower should declare all his gross income and less the incurred expenses: personal and other incurred operating expenses he made during that period. And after all the deductions made, the result will be his net monthly income. Below is an example of a simple income statement I prepared.

Borrower's Income Statement
For the month ended 31 August 2012
  • Income from Monthly Salary - 20, 000

Income from Operation:
  • Fishing boat - 155, 000
  • Tricycle - 9, 300 

Total Income from Operation -      164, 300

Total Gross Monthly Income:    184, 300

Less Operating Expenses:
  • Gasoline and Crude oil for F-boat - 93, 000
  • Gasoline and oil for Tricycle - 1, 550
  • Miscellaneous expenses - 15, 500
  • Salaries of three F-boat men - 23, 250
  • Monthly Commission for Driver Tricycle- 3, 100
  • Utilities - 1, 500
  • Food and Beverages - 3,100
  • Mobile load expenses - 930
  • Medical expenses - 750
  • Travel expenses - 2, 000
  • Recreational expenses - 700
  • Voluntary monthly SSS Contribution - 315

Total Operating Expenses:   (145, 695)

Total Net Monthly Income:      38, 605

The 38, 605ph is the net monthly income of the borrower at which he included on his letter of loan application on paragraph two. And the computation to arrive the said amount was computed above.

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