Ayn Rand, a philosopher wrote, “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver”. To gain this important “tool”, outside financing is often sought from banks, in the form of a loan. When seeking bank financing, it is extremely important to take control and go into your endeavor prepared. What are banks looking for in loan candidates and how can you present yourself as a positive prospect? Take a front seat perspective in your entrepreneurial ambitions. You will learn valuable information about the business of banking as well as lessons in promoting yourself, and ultimately your business.
Some of the most basic principles, utilized by banks in deciding on worthy loan candidates, are known as the five “C’s” of credit. The five “C’s” are comprised of- capacity, capital, collateral, character, condition.
Capacity: This pertains to your ability to repay the loan. The lender will analyze the cash flow from your business venture and factor in a projection for repayment. Having a previous loan experience with the bank where the loan was repaid in a timely fashion can be helpful, as well as having an established deposit account.
Capital: The lender will consider how personally invested you are in this new entrepreneurial enterprise. The logic is that someone with a larger stake in their own undertaking will work diligently to seek success. This can also refer to your ability to acquire additional capital in the event that an infusion is needed.
Collateral: The value of your financed assets will be assessed and factored into the overall equation. The form of assets can vary from buildings, equipment, inventory, and accounts receivables. The value found in such forms of collateral can give the lender a greater sense of security.
Character: This is your opportunity to sell yourself and your team. The lender won’t be investing in just a business- they are investing in the people involved. Your trustworthiness, dependability, and integrity are all things that will be evaluated. Other important factors can include past history with the lender, ability to communicate well and address issues in a timely manner, as well as your experience. The lender will also review your personal history of credit management, including your credit score and, possibly, the details of your credit record.
Condition: This term begs the question “How will the money be used?” Are the funds going toward an increase in trading assets or working capital? Lenders want to know the details and you must be prepared to go in depth to precisely describe your plan for the money. Organization, a good presentation, and preparation will go a long way in this particular area. Banks also consider the current business environment and if your company’s market is experiencing growth or decline or if there is a cyclical nature to your business.
Each of these terms will help the banker further define you as a positive or a negative candidate for a loan. It is also your opportunity to use the research you previously gathered to present yourself as a promising investment.
Gaining the approval of the lender can be daunting, but it can also be a great asset to you. Beyond the benefit of the additional funds, it shows faith in you and your venture. The lender can become part of the team and provide valuable financial guidance along the way.
Creating a worksheet detailing the five “C’s” could be an extremely beneficial project. Answer the questions honestly and prepare yourself to field other inquiries from the lender. Remember, being prepared isn’t just a motto for boy scouts- it is a step towards taking the wheel of your entrepreneurial project and steering towards success!