By Paul Allen |
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When you go to a bank or financial lending institution there are 5
key things they will take into consideration before approving a
loan. These apply to both personal and business loans. Since
the bank or lending institution are in business to make money, they
take these 5 things very seriously and you will want to be prepared
before applying for a business loan. The 5 C's in no particular
order are capital, collateral, conditions, character, and capacity.
Here we will deal specifically how they apply to a business loan.
Capital is the money you personally have invested or will invest in
the business. When applying for a business loan the prospective
lender wants to see what kind of risk are you willing to make to see
this business succeed. The more you personally have invested in the
business the more likely you are to work your hardest to make sure
the business is a success. If you are not willing or prepared to
make a sizable financial investment in the company, more than likely
the lender will not be willing to take a risk either. If your
business is already operating you will be asked to provide personal
and business records showing every detail of the business including
tax records, accounts payable, and accounts receivable.
Collateral is personal and or business assets that you are willing
to put up as security in the event the business cannot repay its
loan. The bank wants to know there is a second source of repayment.
Equipment, buildings, accounts receivable, and in some cases,
inventory is considered possible sources of repayment of the
business loan, anything the bank can sell for cash. Both business
and personal assets can be sources of collateral for a business
loan. Collateral should not be confused with a guarantee. A
guarantee is when someone else signs a guarantee document promising
to repay the loan if you can't. Some lenders may require both
collateral and a guarantee as security for a business loan.
Conditions refer to the purpose of the business loan. Will the money
be used for working capital, additional equipment, or inventory
Other conditions the lender will consider are the economy and
conditions not only within your business but also in businesses that
could affect your business (your suppliers and or service companies
included).
Character is the impression you make on the
potential lender. The lender determines whether or not you can be
trusted to repay the business loan if granted. Some of the things
the lender might ask for are your educational background, your
experience in business and in your industry. More than likely they
will request references for you and the background and experience of
your employees may also be considered.
Capacity to repay the
business loan is the most important of the five factors. The
prospective lender will want to know exactly how you intend to repay
the loan. The lender will consider the cash flow from the business,
the timing of the repayment, and the probability of successful
repayment of the loan. Payment history on other credit
relationships, personal and business, is considered an indicator of
future payment performance. A business must be able to pay all its
debts, not just its loan payments, as they come due. Applicants are
generally required to provide a report on when their income will
become cash and when their expenses must be paid. This report is
usually in the form of a cash flow projection, broken down on a
monthly basis, and covering the first annual period after the loan
is received.
Before applying for a business loan keep the 5
Cs in mind and be prepared. Taking time to organize, have your plans
in writing, and a positive attitude will take you great steps
towards receiving the financial backing you are seeking for your
business.
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