Why does my bank need so much information?
I hear this phrase a lot from my customers, and from my own mouth. As a small business owner I struggle in the daily life of a banker with this same question.
Recently my side company purchased an additional semi truck. We had been searching for several months and decided on a shiny new International LT. we gave the application to the dealer and within a day we were approved.
I was thinking "great!" until the final details were read. We would need 5% down, not a big deal, but the interest rate would be over 9%. This was a big issue being that I make loans everyday. We decided to look into traditional financing.
I approached the bank with all of the prepared financial information.
3 yrs of business tax returns
3 yrs personal tax returns
Personal financial statement
Debt schedule
Projections on how we could pay the new debt
Application
As you can see above this is much more information than we needed at the dealership. The loan was approved in about two days and we were able to get 100% financing with a rate about 5% cheaper.
The reason why the dealership needs so little information is that they will be selling the loan to the highest bidding bank. When the dealership send your credit information out to several different banks they have agreements that they would pay a certain percentage or a finders fee for new loans. Sometimes it's the best rate for the customer another time it's the best fee for the dealership.
The banks on the other hand must make sure that the deal makes sense for them. They're also interested in building a long-term relationship with the business. Lending in general is based on risk/reward. This is why you see high interest rates on credit cards.
There are lots of risk so therefore it requires lots of reward. Conversely when you borrow money from a bank it is making sure that you are in good financial condition. There is still risk, but not nearly as much which is why you get a better interest rate.
Thank you for taking the time to read my blogs. I am in no way a subject expert and these are simply my opinions. I welcome any thoughts and discussion.
