What Do You Need for a Business Loan? Here Are The 6 C's

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This is about the 6 Cs of getting a loan from your bank. It’s about you getting to know your bank manager and the lending criteria of his/her employer. Like all relationships you have to be conscious of the requirements of the other party. Read on to find out what do you need for a business loan: here are the 6 C's:


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If the bank lends it will want to make sure it gets its money back: it has shareholders and depositors, it’s accountable to the community and it needs to make margin and profit.

If the bank manager takes your application and agrees to put it to underwriting, you need to make sure that he/she is confident of your story, the strength of your business, the record of you and your team.

You also want to make sure that you are telling your story in a way that’s understandable – not only to the bank manager but even more importantly to the faceless and unknown underwriting team that will put your application through the wringer. In considering a business loan for any purpose, this team is going to assess the potential risk to the bank and its shareholders. It is going to review a variety of criteria.

Generally, before lending bankers go through the 5 C's of Credit checklist: character, capital, capacity, collateral, conditions. And there's a final one for you - care.

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Character

The lender will consider the character of the company’s decision maker. Is he/she the owner? The manager? A key personnel? What’s his/her background? Has he/she performed on obligations in the past? If there has been credit problems are they up-front. Does the manager of this company have business skills? What’s his/her depth of knowledge in this market? Assume there will be background checks.

Capacity

The second C is Capacity. Capacity is ability to repay the loan. Lenders determine this in large part by analysing statements to show history of the company’s profitability and a pattern of cash flow. Other income not necessarily from the business can be taken into account. Your accountant should be involved in preparing accounts for your application and everything needs to be explained – the good and the bad.

Capital

The third C of credit is Capital. Underwriters will want to see that the company is adequately capitalised? The application or prop will need to show where the capital come from? If it was it borrowed? Did it come from savings? Lenders look favourably at owners who have risked their own funds in the business. That’s a shared partnership.

The bank will check to see that the capital is adequate to support the recurring operations and debt needs of the company; It will make sure that there is a cushion of capital in case of hard times. It will also risk assess: for example if the economy hits hard times, does the business have the capacity to take care of its obligations? The business might have to come up with more equity or go to the bank and increase its facility there.

Collateral

The fourth C is Collateral. It provides a secondary source of repayment in the event of a default. If a bank has to liquidate that asset, it’s a worst-case scenario for the bank. It’s looking to recapture as much of its depositors money as It can on the loan. So when collateral is being valued it will be margined; it will not be market value. A forced sale will have a lesser value. When banks take property as collateral, they want to make sure that they get a fair valuation, not excessive and not low, but a realistic evaluation of that asset.

Conditions

The fifth C of credit is Conditions. When the lender considers loan requests, it also looks at conditions to place on the loan. These conditions help the lender feel comfortable with future uncertainties and risks by setting standards of acceptable future performance by your company.

Care

Let’s add a last C and that’s be Careful. Be careful in how you present your case to the bank. Be careful in the information that you present – make sure it's truthful and authentic; explain the good and the bad. And be careful that you can stand over what you put your name to – because ultimately taking finance is a legal transaction.

Over to you now. What's your experience of applying for a business loan? Any tips from your experience for what do you need for a business loan? Share your experience and tips in the comments below. 

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