Small
Business Loan Application: The 5
C's of Assessing a Small Business Loan
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 “5 Cs” 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.
Carbon Finance Ltd
