Whether you are starting a new business from the ground up or you are an established business owner, there will likely be a day when you must apply for financing.
Whatever the need, you’ll want to make sure you are a well-qualified borrower by doing some work ahead of time to increase your chances of being approved. For the best results, you’ll want to make sure you meet the criteria of the Five C's of Credit.
When you apply for small business financing, a lender will determine your creditworthiness by seeing how you match up with the Five Cs of Credit: Character, capacity, capital, collateral and conditions.
Before approving you for financing, the lender will want to know a little bit about who you are and what kind of person you are. Are you honest? Reliable? Do you have a good reputation in the community? They will also look at your credit score to make sure they can rely on your ability to pay off your debts on time.
This refers to your cash flow and your ability to pay off the debt. The lender will not only look at your small business’s cash flow but also your personal finances. Will your business generate enough income to support itself in addition to your salary and your expenditures? If not, are there other revenue streams that can support your lifestyle or a potential shortfall in the business?
Capital is the amount of cash you have on hand. The more cash you are able to inject into the business, the more likely you will appear to be able to pay back the debt, even if you must work through challenging times.
Collateral refers to any assets that can be used by the bank to secure the small business’s loans. This could be real estate, equipment or inventory, accounts receivables, etc. If the business is unable to pay its debts, then the collateral is sold to pay off the remaining loan balances.
If you’re applying for financing, the lender is going to be interested in what is going on in your industry and whether any of these conditions could create a challenge for your business. Being aware of potential challenges is critical during the first one to three years, which can be lean years for a startup business.
One of the easiest ways to make sure you’re meeting the criteria of the Five Cs of Credit is to make sure you’re doing your research before you apply for financing. Small businesses that succeed tend to be the ones that plan and prepare adequately prior to starting their business.
The first meeting with your lender is your opportunity to educate them about you. Let them know if you have been a part of any organizations, volunteer groups or have owned other businesses.
You’ll want to show the lender that you have researched the conditions, including your competitors and any possible challenges that could occur. Discuss your current capital and capacity standing to determine if you have what is needed for the project.
If you’re taking over an existing business, a portion of the financing could go toward blue sky – which is non-physical assets like a business's name and reputation, or a book of clients. With a lack of physical assets, you may have a collateral shortfall. When there is a shortage in collateral, options will be considered to minimize or eliminate that situation.
There are a lot of resources available to help you increase your chances of being approved for financing. The Small Business Administration (SBA) or your local Small Business Development Center (SBDC) are great starting points. They can help you with business plans and projections, as well as provide data about the industry conditions, for free. Borrowers that have utilized these resources may have a much higher likelihood of success and being approved for funding.
Choose a lender that will be a good partner to your business in ways that go beyond providing financing. There are many things to consider when running a business, especially a startup, such as staffing, marketing, taxes, your business structure, and legal issues. Your lender may not have expertise in all these areas, but they should be able to connect you with the people that do.
At Northwest Bank, we have the resources and capabilities of a big bank with a community approach. Not only can we provide services for all your financial needs, but we are invested in the local community enough to understand you and your business.
Contact a commercial banker at Northwest Bank to get started.
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