It is your job to make their job easy. So, what does a bank want to see?
Certainly, a top consideration is reliability, and that is determined under a set of standard conditions often colloquially referred to as the “Five Cs”. Knowing the Cs ahead of time will help you to anticipate, prepare and ultimately get that loan for your small business.
The 5 C’s are:
1. Character. Character is first for a reason. In the end, business is about relationships, and much of your ability to forge a positive relationship with a bank is based on your reputation; the character of your business and yourself.
Much like a job application, a bank will look at your business and personal history, your experience, at your references, and your educational background. The quality and experience of your employees is considered. So of course, is your credit history. Your credit score is meant to serve as a reflection of your ability and willingness to both borrow and pay back lent money, which is the primary factor banks consider.
This is where the second C comes in.
2. Capacity. This C refers to a business owner’s capacity to repay the loan. The loan applicant must explain exactly, in detail, how they plan to pay back the loan. Credit history is the first and primary indicator of future payment performance. Financial statements are analyzed to determine if the loan applicant has the capacity to repay the loan. In addition to financial history, track records, past employment, and experience in business and in a particular field are also analyzed to conclude whether the applicant has the capacity to successfully handle the loan.
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3. Capital. The third C looks at how much money the applicant has personally invested into their startup, the business’s net worth, and the amount requested in relation to that. Having personally invested more capital means that the borrower has more at stake; to lenders, this is an indication of ownership, responsibility and taking the success of the venture seriously. It also means that the business is at least somewhat established, and therefore more viable. You are unlikely to receive a business loan if you don’t have any skin in the game, or if you are seeking too much capital.
4. Collateral. Is the applicant in possession of assets that could protect the lender in case of default? Things like property and insurance are considered.
Similar to collateral is a guarantee – a document signed by an individual (usually the business owner) promising to pay back the loan if the business cannot. Not all lenders or loans require guarantees, but many do.
5. Conditions. Finally, general economic conditions are often at play – that is, external factors that could potentially affect the success of the applicant’s business. Economic factors are considered, both within the specific industry of the business as well as other industries that could potentially impact that business. Macro factors are also considered, such as interest rates, inflation, deflation, supply and demand, and competition.
While this one is out of your control, if you prepare yourself ahead of time and present the bank with concrete ways your business plans to respond to these external conditions, it bodes well in your favor.
On a personal note, I strongly suggest you meet with your banker well before you apply. One thing I have learned is that your business banker can help prepare you, and your business, to get to yes.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business Success.© Steven D. Strauss.
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