Getting
Credit For Your Business
Cash. Money. Capital.
Financing. No matter what you call it, one thing is for certain – you can't
start or run a business without it. A business may begin with a concept, an
idea, a vision, but it takes cold, hard cash to turn those intangibles into a
viable enterprise. If you own a business or plan to start one, sooner or later
you will need financing. As anyone who has ever applied for business financing
can attest, when that time comes, it helps to know what lenders are looking for.
Lenders often use the “Five C’s” of credit when assessing a business loan
proposal or credit line application. The Five C’s stand for character,
capacity, capital, collateral, and conditions.
Character
From the lender’s
perspective, character is a reflection of your stability and your willingness to
repay your credit obligations. Though character is somewhat intangible, don’t
underestimate its importance to lenders. In evaluating character, lenders look
for honesty, integrity, and trustworthiness. A smaller community bank might also
take into account referrals from respected community members and your own level
of community involvement. In making a character judgment, the lender will also
look at your credit history and your commitment to the business. Have you used
credit in the past and paid it back on time? Have you changed jobs often or
moved frequently? An unblemished credit history indicates that you’re likely
to be a good credit risk.
Capacity
Capacity refers to your
business's ability to generate enough cash to repay the loan. To make that
determination, the lender will look at your business's earning power, income and
cash flow analyses, and your sales and expense projections. Your existing credit
commitments will also be considered in determining whether you can afford the
loan. The lender uses this information to gain insight into your business's
market demand, business cycles, competitive position, and the financial savvy
and competency of key management. More important, this information shows whether
the company's sales can support the repayment of the loan and your other
financial commitments.
A comprehensive, well-prepared
business plan is a great tool for demonstrating capacity. By showing how much
you need to borrow, how you plan to use the funds, and how you will repay the
money you borrow, you can instill a level of confidence in the lender.
Capital
Capital refers to your level
of investment in the business. If you’re not willing to risk personal funds,
why should the lender take all the risk? Although there are no hard fast rules
about what constitutes an acceptable level of personal investment, lenders like
to see business owners who are willing to take a proportionate share of the
risk. A business owner with a significant financial stake in the business shows
commitment to the business endeavor and confidence in its potential success.
Collateral
Collateral is property the
borrower pledges to protect the lender's interests. Collateral might take the
form of business inventory, or the equipment or property the business owner is
purchasing with the borrowed money. The amount and type of collateral the lender
requires will depend on the type and purpose of your loan, as well as your
credit history.
If your business has no fixed
assets to serve as collateral, the lender may demand that you collateralize the
loan with your personal assets. Many small business loans are backed by the
equity in the borrower’s home. Most lenders believe that if a borrower is
willing to put up his or her home as collateral, he or she certainly intends to
repay the loan. Keep in mind that the lender sees collateral as a secondary
source of repayment in the event that you fail to repay the loan. The lender
really has no interest in taking possession of your company's inventory of
500,000 widgets or its nearly new backhoe. The lender’s hope is that, with
something of value at stake, you will be more inclined to repay the loan.
Conditions
The final “C” –
conditions – relates to external factors that affect the success of the
business, including the overall national and local economy, industry trends,
regulatory, legal and liability issues, and local competition. While these
factors typically are beyond the business owner’s control, lenders need to
consider them in making credit decisions.
Consult With A CPA
Contrary
to what many new business owners believe, banks want to lend money to
credit-worthy businesses. To demonstrate that you and your business are a good
credit risk, you might want to consult with a CPA who specializes in small
businesses. He or she can provide valuable advice on how to present your
business in its best light.