How to Get a Business Loan
By: Ryan Attelle
Remembering what is called “The Five C's of Credit” can help any business get the loan they are seeking
Character: A businesses character is developed by demonstrating how they have handled credit in the past. Has the business paid all of it's bill on time? Obtaining a credit report is key checking up on the status businesses character. Other considerations for character include the educational background of the business owners, experience in business and the particular field in which the business is involved.
Collateral: Collateral is additional security a business can provide the lender. When a business provides collateral to a lender it means they are pledging an assets they own. In the instance the business in unable to repay the loan then the assets put up for collateral will pay for the remaining balance. There is also what is called a guarantee. In this instance the business owner signs a document which states an individual as responsible for repaying the loan should the business fail to do so. Some lenders ask for both a guarantee and collateral.
Capital: Capital is the initial investment an individual or individuals have made in the business. Capital is an indication of how much these individuals have at risk should the business fail. Lenders be come more willing to lend when shown evidence of an individuals personal investments. Undertaking personal financial risk represents an increased level of dedication to accomplishing goals and repaying loans.
Conditions: The conditions explain why a business wants the loan and what they intend to do with the money. What exactly will the money be used for, new equipment, working capital, maybe an increase in inventory? A lender also looks at the local economic conditions. They look at these economic conditions not only in the industry of the business applying for the loan but also in the industries that may effect that business as well.
Capacity: This is often considered the most important of the five C's because it is the main source of repayment, cash. The lender is most interested in precisely how the business plans on repaying the loan. A good indication of how this can be achieved is by looking at the businesses cash flow. They will also be looking into the timing of the repayment plan, in that they want to know how long it will take to repay the loan. They also focus greatly on the probability of repayment. Also payment history on previous personal or commercial loans will be taken into consideration, helping them determine the probability of repayment. Lastly lenders will be interested in possible alternative sources of income for repayment.
Most knowledgeable business professionals have probably already heard of the five C's of credit, but this is usually a surface level understanding. It is important to dive in to each individual topic and truly understand how leaders look at businesses. In doing so a business greatly increases there chances of obtaining a business loan, even in a tough economy.
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