Getting a loan for a new startup business or trying to find money for an existing business can be difficult in the current economic environment. Do you know what your banker is thinking when you ask for a loan or turn in that business plan? The lender is looking for answers which fall into certain categories popularly referred to as the 'Six C's of Credit'. If you answer all these properly, you'll increase your chances of getting approval.
1. Character
The key word here is trustworthiness. A banker doesn't even have to look at your idea to reject you so first impressions are important. Common questions might be: How long have you been in business? Do you honor commitments? How long have you lived here? The answers to these questions, plus solid references, may help. Most of the questions will come from a business plan but how you are personally viewed when you walk into the bankers office can help. Don't have outstanding debt and have a good credit history.
2. Capacity
The banker will decide whether you're in a position to repay the loan. This is based upon your business plan plus a series of questions. What profits will you make in a set timeframe? What are the growth prospects? These answers, plus your business plan, must give the lender information on when the profit will start and if it's sustainable. He must feel that you are a good risk and able to repay the loan.
3. Capital
You must be personally invested in your business in both time and money. What dollars are you investing in your business and how will this continue throughout the business startup?
4. Collateral
Collateral is the backup plan if the growth or breakeven plans do not pan out. The bank wants to assure repayment, so there must be a secondary source of money; goodwill does not count. Those forms of security may include property, equipment, inventory, tangible assets, or accounts receivable.
5. Conditions
What are the loan terms? The banker would look at amount, length of the loan and its purpose. The local and national economic scene would play a significant part as well.
6. Cash Flow
The banker wants to know where is the money going and how is the business owner going to repay it? Is there or will there be adequate cash flow?
Bankers lend money while startups and small businesses often need some, a match. Both are looking for a win/win situation. But, it must be advantageous for him to provide a loan to a business. All questions lead to the same conclusion. Although the names may change slightly, all bankers are looking for the same information.
The bank, if it lends money, must be paid back in a timely fashion, with a reasonable profit. The 'Six C's of Credit' help the banker assess whether the business can and will. It is an advantage to the business owner to understand what expectations and questions the banker might have before applying for a loan.
Sources:
- " Six Credit Secrets That Every Consumer Ought To Know." DebtWarriors.com
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