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The 5C's of Finance: Business Loans
By Paul Allen
The 5 C's of Finance: Business Loans
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 loans. Since the bank or lending institution are in to make money, they take these 5 things very seriously and you will want to be prepared before applying for a 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 loan.
Capital is the money you personally have invested or will invest in the business. When applying for a loan the prospective lender wants to see what kind of risk are you willing to make to see this succeed. The more you personally have invested in the the more likely you are to work your hardest to make sure the 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 is already operating you will be asked to provide personal and records showing every detail of the including tax records, accounts payable, and accounts receivable.
Collateral is personal and or assets that you are willing to put up as security in the event the 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 loan, anything the bank can sell for cash. Both
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and personal assets can be sources of collateral for a 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 loan.
Conditions refer to the purpose of the 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 but also in businesses that could affect your (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 loan if granted. Some of the things the lender might ask for are your educational background, your experience in 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 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 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 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
Carbon Finance Ltd
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