Five C’s of credit help determine loans

By Sandra Taylor-Sawyer: Guest columnist

What does it take to obtain a business loan?

This is an important question for today.

According to local lenders, important elements they consider are the five C’s of Credit: Character, capacity, capital, collateral, and conditions. Other C’s that can be used to evaluate a loan are customer relationship, competition, career history and collections.

A lender will inquire as to the borrower’s ability to repay the loan. Business and personal references will be used to determine the character of an individual.

Lenders often determine character by their “gut” feeling. This is the first “C of Credit.” A borrower must be able to demonstrate they have the experience to successfully operate the business in order to generate sufficient revenue to cover expenses and the loan payment. This is capacity or cash flow.

Lenders are not interested in being the sole financial partner in a business. Therefore, business owners must be willing to contribute monetarily to the business. This is capital, the third “C of Credit.”

Lenders will always look to secondary sources of repayment, known as collateral. It is common to pledge business assets in order to secure a loan. In addition, pledging of personal assets such as the home of the business owner may be essential to obtain the loan.

Another important factor in seeking a loan is having a well-thought out analysis before starting or expanding a business. Lenders agree it is beneficial to plan, plan and plan. Knowing the ins and outs of the business will help the business owner understand what they are about to undertake. In addition, a comprehensive cost analysis and reasonable research should be conducted to demonstrate that sufficient sales will be generated to cover costs.

For an existing business it is important to analyze the trends. A review to determine if profits are increasing, decreasing or stable is a start. An assessment of the business owners’ ability to implement changes in order to maintain or improve profitability must be explored.