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It is almost inevitable that at some point during the life of a small business, it will need business credit, business financing or business loans. This could happen during the start up of the small business or later for the purpose of business debt financing or small business expansion. It can also happen when the business has contracted a large sale for goods or services but needs the cash or business credit to cover up front costs. Whatever the need is for business credit or business financing, there are particular elements a small business owner needs to be aware of when seeking business financing.
Small business owners need to know that whether the small business has bad credit or no credit, in the majority of cases, some form of business credit or financing is available. This is possible even if the small business owner has been rejected for a small business loan by the bank.
There are five primary elements a lender will consider when reviewing your loan applications. The five “C’s” of lending for small business loans are character, cash flow, collateral, capitalization and conditions.
1. Character
The basis here is the borrower’s credit report and his or her payment trends.
2. Cash Flow
There needs to be adequate cash flow available to repay the loan and allow the borrower to pay for all other small business expenses, including their personal needs. This is true whether calculating a business' previous experience or making projections for a small business expansion or a startup.
3. Collateral
These are the assets that the borrower offers to the lender to secure a small business loan in the event it is not repaid. The primary collateral will be the small business’ assets, but if these are not sufficient, personal assets may be required as additional security.
4. Capitalization
This consists of the small business’ resources including fixed assets, retained earnings, and the owner’s equity. Funds borrowed from a source such as the seller of a small business do not improve the equity position of a borrower.
5. Conditions
This refers to the outside factors that will be considered, such as competition and trends of similar small businesses in the industry.
When you, as a small business owner are seeking business financing, ask yourself how well you meet these criteria. The more you prepare yourself in advance of meeting with a potential lender, the more you increase the odds of getting the financing you require.
Small business owners need to know that whether the small business has bad credit or no credit, in the majority of cases, some form of business credit or financing is available. This is possible even if the small business owner has been rejected for a small business loan by the bank.
There are five primary elements a lender will consider when reviewing your loan applications. The five “C’s” of lending for small business loans are character, cash flow, collateral, capitalization and conditions.
1. Character
The basis here is the borrower’s credit report and his or her payment trends.
2. Cash Flow
There needs to be adequate cash flow available to repay the loan and allow the borrower to pay for all other small business expenses, including their personal needs. This is true whether calculating a business' previous experience or making projections for a small business expansion or a startup.
3. Collateral
These are the assets that the borrower offers to the lender to secure a small business loan in the event it is not repaid. The primary collateral will be the small business’ assets, but if these are not sufficient, personal assets may be required as additional security.
4. Capitalization
This consists of the small business’ resources including fixed assets, retained earnings, and the owner’s equity. Funds borrowed from a source such as the seller of a small business do not improve the equity position of a borrower.
5. Conditions
This refers to the outside factors that will be considered, such as competition and trends of similar small businesses in the industry.
When you, as a small business owner are seeking business financing, ask yourself how well you meet these criteria. The more you prepare yourself in advance of meeting with a potential lender, the more you increase the odds of getting the financing you require.