The 6 C’s and the Keys to Getting Business Funding
When you need business funding, lenders will evaluate your creditworthiness based on 6 key attributes.
Doing so gives them insight into how much risk they are likely to take on if they give you a loan and helps them determine just how much money they will lend you. Ready to grow your business? Don’t wait to master these 6 C’s of business creditworthiness:
This is your assets compared to liabilities and the amount of money you’ve invested.
Lenders are unlikely to finance 100% of a proposed business venture, so they’re keenly interested in how much the business owners or management team have invested in the enterprise. They also want to know about your capital assets like inventory and equipment. These demonstrate your commitment to the business and provide a lender with the added security that you can pay the loan back.
This is your income and cash cushion to support debt and unexpected expenses.
When it comes to borrowing, capacity really comes down to cash flow. By calculating cash income versus cash expenditures, you can identify cash flow patterns (how much and when money is coming in and going out of your business). Strong cash flow means you can pay upcoming bills and cover the next pay period. But indications of a strong cash flow also show the lender that you can pay a loan back. Is your cash flow not so strong? Build your business credit capacity by paying down some debt before applying for a loan.
This can include cash, receivables, equipment, and real estate.
Some types of loans – like auto loans and certain inventory loans – are self-collateralizing, which means that the asset you’re financing acts as collateral (or secondary source of repayment) for the loan. Otherwise, your business and personal assets may be needed to secure a loan. Collateral can be cash, equipment, commercial property, inventory, or accounts receivable. A creditor will look at each form of collateral closely, as well as any debt attached to it. Be sure you have a full list of your collateral assets before you apply for a loan.
This can include external factors such as the economy, industry trends, and regulation.
What is the current state of your business, your industry, and the economy? Although there’s not much you can do about industrywide developments or pending legislation, these will undoubtedly affect how much capital will be loaned because of the impact these factors might have on your ability to pay back your loan. Experts suggest you apply for a line of credit when your industry and business are in a strong position, so you have the financing available when you need it.
This can include your personal experience, credit history, and legal judgements or liens.
Character is much harder to measure than cash in the bank, but your integrity and history (both credit-related and experience-related) are essential attributes. Financers like to see industry experience and solid credit history. It’s a good idea to request a copy of your credit report so you can address any discrepancies before you apply. To demonstrate your intangible positive qualities to a lender, gather a list of professional references, such as from an accountant, lawyer, or business advisor, that you can share. In addition, come prepared to explain the care and effort you have put into your business planning and management process.
This is how you present your proposed business plan based on opportunities and challenges.
This item is sometimes left off lists of creditworthiness C’s, but it’s one of the most important for continued success. Establishing a relationship with your lender requires frequent and forthright communication. Provide details about your business, your industry, and your goals, as well as your financing needs. An honest back-and-forth conversation is a great starting point when applying for a loan. Ongoing dialogue strengthens the relationship.
The Bottom Line
Most lenders rely on a combination of these attributes; some C’s carry more weight than others based on your type of business, the type of financing you’re pursuing, and prevailing market trends. Don’t hesitate to reach out to your financial institution to learn more about how lending decisions are made, so you know where to direct your efforts first.
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Consult your financial institution for more information about business lending solutions.