Final answer:
Banks conduct various analyses including income verification, credit checks, and possibly require a cosigner or collateral before approving a commercial loan. These measures are taken to mitigate the risk of default and ensure that the borrower is capable of repaying the loan.
Step-by-step explanation:
Analysis for Commercial Loan Approval
Banks perform several types of analysis before approving a commercial loan to ensure the repayment capability of the borrower. Initially, a bank requires a prospective borrower to provide income sources through various forms. A thorough credit check is conducted to assess the borrower's credit history and past borrowing patterns. Additionally, banks may require a cosigner, which is another person or entity who pledges to repay the loan if the original borrower defaults.
Another critical factor is the need for collateral, such as property or equipment, which the bank can legally seize and sell if the loan is not repaid. This security interest protects the bank's investment. Some banks also scrutinized borrowers to minimize the risk of default and avoid the need to issue subprime loans, which can be riskier. These are known for features such as low down-payments and less rigorous checks on the borrower's income reliability, sometimes referred to as NINJA loans during the mid-2000s crisis.