Wouldn’t it be nice to receive some financial assistance every now and then? Unfortunately, when it comes to business loans, not everyone qualifies. You’ve got to prove yourself to be a trustworthy and capable applicant. After all, you’re asking someone to put money on the line to finance your endeavors. The best way to increase your odds of obtaining a loan is to look at things from the eyes of the lender. We’re going to share the factors that banks use to evaluate applicants – meet the 6 Cs of credit.
The 6 Cs of Credit Explained
This refers to the six different factors lenders use to evaluate a loan application.
Character: Your personal character can go a long way when it comes to securing a loan. In fact, many consider it to be the most important factor. Banks and lenders are seeking applicants whose character says they can be relied upon. A potential lender will consider various aspects of your background, including your credit history, employment history, education and more. They will really want to assess your knowledge and skills in managing a business due to the nature of the loan.
Capacity: This refers to your ability to repay any potential loans. There are several components a lender will consider under this factor. First, they will take into account the actual or expected cash flows of your business. A positive cash flow indicates an ability to meet interest payments as they come due. Next is yours or your business’s payment history on previous or outstanding loans. This is the quickest way to see how you deal with loans. Lastly, they will consider any contingency funds you have set aside that can be accessed if need be.
Capital: Here the lender will basically be assessing how much skin in the game you personally have. The more equity you have in the project the better. A higher ratio between your current equity and the value of the loan you are applying for is preferable. Generally, having at least 25% equity in the project is what lenders look for.
Collateral: Lenders will also consider any assets that you could post as collateral. This can include assets like account receivables, inventory and machinery, or equipment to name a few. In the case that you cannot repay the loan, the lender will obtain ownership of these assets to try and recover their initial loan.
Conditions: This factor refers to the general economy and the nature of the loan itself. Two aspects of the economy will be considered – its overall state and how it relates to the particular industry at hand. The lender will be interested in the current competitive landscape and the overall size of the market. Other social and political factors will come into play here too. After all, why would a lender want to put money into a dying or poor performing industry? This increases the chance that the applicant won’t meet financial forecasts and be unable to pay back the loan. Basically, what you’re doing with the money matters as much as who is receiving the money.
Confidence: This final factor of confidence plays a key role in obtaining a loan. The lender must have confidence in you, your business and your ability to repay the loan in a timely fashion. Of course, being in good standing on the above five criteria is a good place to start. Ultimately, lenders will want to work with individuals who are professional, honest, reliable and capable.
These are the primary factors you should consider when sizing yourself up as a solid candidate to receive a conventional loan. To assist with the process, you can obtain referral letters to help demonstrate your ability to make timely payments. In some cases, you may even find a guarantor who will be responsible for paying the loan in case that you are unable to. However, getting a guarantor for a business loan is another discussion we will leave for later.
And of course, if you are still unable to secure a conventional loan there are still more options out there. You can fund projects using
other people’s money, obtain a hard money loan or seek out 2, to name a few. nd mortgage options
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