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What Is the Process of Credit Application?

If your business requires an infusion of cash to fuel growth or line of credit to purchase inventory, you’ll need to fill out a credit application form. What can you expect to see on a credit application form, and how does the process work? We’ll explore these questions below.

What is a credit application?

Before you can obtain credit from a lender, you’ll need to prove your creditworthiness with an application form. These may be administered online, in written form, or in person with a bank representative. A credit application fulfils two main purposes:

  1. It provides the lender with enough details to determine the borrower’s likeliness to repay the loan.

  2. It provides the borrower with details to determine the cost of credit, such as interest rates and fees.

Elements of a business credit application form

Whether you’re applying for credit or plan to extend credit to a supplier, there are certain elements that you’ll see on any credit application form template UK. Lending decisions are based on quantifiable factors like credit history, credit score, and debt to income ratio. Each lender uses its own underwriting standards, but a general debt to income ratio used is 35% or less.

Here’s what is typically included on a business credit application form:

  • Business name, address, phone, and email numbers

  • Identifying details of principals or owners

  • Business structure

  • Industry type

  • Number of employees

  • Bank and trade payment references

  • Credit history

Understanding the credit application process

Most credit applications are now filled out online, particularly those processed through major banks and online lending platforms. However, you can also fill out your application on paper and meet face to face with customer service representatives at a bank. This will be required if you wish to borrow larger sums of money, take out a business loan, or open a bank line of credit.

Once you’ve filled out and submitted your application, it will go to the lender for approval. A credit underwriter will use a series of risk assessment tools to determine the borrower’s ability to make timely payments. Depending on the type of credit line requested, underwriting might include the following steps:

  • Assessment of profitability comparing the applicant’s expenses and revenues

  • Calculation of financial ratios including current ratio, debt to equity ratio, and debt to asset ratio

  • Examination of cash flow statement to ensure the applicant has steady streams of cash flowing into the business

  • Comparison with similar businesses in the same industry to see how the applicant measures up

As a final step, the lender may then check trade or bank references to find out more about the applicant’s payment history. They’ll want to find out if the applicant pays bills on time, relies on seasonal income, or if there are any other patterns to be aware of.

Types of credit application forms

Normally, credit application forms can be divided into two categories, including applications for consumers and businesses. Both require similar information used to assess the borrower’s ability to repay any debts.

You might also see the term referring to credits in the benefits system, including:

  • Universal credit application

  • Pension credit application

However, benefit-related items like the universal credit application form don’t really apply to businesses and go through a completely different approval process overseen by the government.

You can find a credit application form template UK containing the elements mentioned above directly from your financial institution, or online at template websites. These can be used if you’re thinking of extending credit to your own suppliers as a business, or simply to give you an idea of what to expect when applying for credit of your own.

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