Credit Application

From CEOpedia | Management online

A credit application is a written document that the borrower submits to the institution that borrows money. This document can be submitted either in person or online. The application contains information about the amount that the borrower wants to obtain, all personal data. Due to the application process, the lender obtains information necessary to analyze the credit decision. The decisions contained in the credit application assess the financial credibility of the clients, which affects the credit conditions.

Usually, the following information is required and should be included in the bank's credit application [1]:

  • name of the applicant's employer and applicant income,
  • name of the applicant's bank,
  • bank account number,
  • the balance on account,
  • list of assets,
  • credit card number and amounts owed
  • list of other debts

The lender will contact the applicant's employer, bank and credit card company to confirm information about the application and ask questions about the applicant's credit history. If the applicant is financially responsible, it means that he achieves a minimum level of income, has not issued many insufficient financial checks and has made bank payments and credit cards promptly - the company accepts the application [2].

Assessing the credit application

With the submission of the application, the bank obtains permission from the future borrower to obtain information from a credit-reporting agency and to consult with other lenders who have dealt with a potential client. Thanks to this, the bank controls the borrower's credit history. The lender then has access to all previous debts incurred. Applicants do not disclose credit information in order not to deteriorate their position. If the bank finds hidden obligations, the applicant receives a negative opinion. Banks require very detailed personal data that is subject to verification. The evidence used by the bank is driving license, ID card, citizenship certificate and passport. In some institutions, as part of verification, the bank sends letters to the address of residence and asks the client to return them to the bank. Thanks to this, the bank can be sure that the borrower lives at the address indicated. It is also important for the lender how long the applicant resides at the address. This is not good for the lender, when the customer often changes his place of residence because it indicates his instability. If the application relates to a home credit, it is necessary to provide the bank with permission from the local authorities for such action in the given place. This applies to the permit to connect water, electricity as well as the building permit for the indicated land.

Analysis of financial statements for a credit application

Lenders analyze financial statements because they give them a complete picture of the company's condition and provide answers to questions that are the subject of any credit analysis:

  • answers regarding the decision as to whether the bank should grant the credit request
  • the company's ability to repay the credit with designated interest
  • business collateral if the credit assumptions prove to be incorrect and it will not be able to pay back the money borrowed
  • The company is run profitably

Granting a credit to a lender who is in good financial condition is less risky. Information that allows the lender to determine if a company is in good financial condition [3]:

  • The company has sufficient liquidity that allows it to meet its short-term obligations without problems
  • The company achieves success and revenues are satisfying among competitors
  • The owner has high shares in the company
  • The company is not over-burdened

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  1. B Cunningham, LA Nikolai, J Bazley 2014, p.251
  2. B Cunningham, LA Nikolai, J Bazley 2014, p.252
  3. M Sathye, J Bartle, R Boffey 2013, p.7

Author: Karolina Kaleta