Cash flow and business expansion are key to the success of your business. However, it is becoming increasingly harder to secure business financing as banks cut back on start-up loans, which are among the riskiest a bank can take on.
A lender just wants to know three things: the amount you need, how you plan to pay it back, and how they will recover it in case you fail to pay. To stand a better chance of getting financing for your business, you need to meet the following 4 Cs of business financing:
The first C stands for character, which refers to a borrower’s financial history. This could be a person or a business, or both. The question to ask here is what kind of a “financial citizen” a business or a person is. Nothing highlights the character of a business or person better than their credit history, which is based on one’s credit score. Delinquencies, late payments, your total debt, and the available credit could jeopardize your financial character.
The second C stands for credibility, your credibility, which refers to your ability to convince a potential lender to see the bright prospects your business has. To demonstrate your credibility, you need a credible business plan that shows your profit projections, which is what you will rely on to pay back the loan. You also need a good personal credit rating since you may you have to provide a personal guarantee for the loan. A lender will scrutinize your credit report for a healthy history of meeting your financial obligations before they accept a personal guarantee.
The third C stands for “collateral”, which simply implies putting some of your funds on the line in case you default. This is like a “down payment” that “secures” your loan for a scenario where your business can’t pay, won’t pay. If such a scenario were to suffice, your lender wants you to bear some of the responsibility by putting your business and personal funds on the line. Some lenders may even insist on a 100% down payment.
Of course, it won’t make sense to provide 100% funding, otherwise, you won’t need the loan in the first place! What your lender is looking for are personal or business assets they can liquidate in case you default. The bank may also ask you to get a cosigner in case you don’t have assets that can be attached to your loan.
The last C stands for “capital”, which refers to your business assets. You may be required to provide your lender with a list of your business assets to act as security for your loan. For startups, which don’t have capital assets that can be relied on as security for a loan, getting capital is the hardest part of securing business financing. In fact, the reason they are applying for a loan could be to buy what would otherwise be considered a capital asset.
Sometimes you can avail your personal capital assets to secure a business loan. One thing to be aware of is that capital assets are priced at the current market value, not at the price you bought them for since depreciation lowers the value of an item.
For instance, if you acquired a business item five years ago at $40,000, the lender won’t give you a loan of $40,000 for it. This is because its current market value has depreciated since you bought it. Due to the dynamics of depreciation and current market prices of most capital assets, most lenders weigh in more on collateral and credibility and less on capital.
To increase your chances of securing a business loan, become a good “financial citizen” of impeccable character and credibility. Besides, having collateral to guarantee your loan, and capital to secure it, goes a long way in convincing a lender to approve your business loan.