character -
highly subjective evaluation of the business owner’s personal
history. Lenders have to believe that a business owner is a
reliable individual who can be depended on to repay the loan.
Background characteristics such as personal credit history,
education, and work experience are all factors inn this business
credit analysis. Character is the single most important factor
considered by a reputable bank. Banks want to do business with
people who are honest, ethical and fair. (The difference between
the ability to
repay a loan and the willingness to repay a loan is
an example of a person’s character.)
capacity -
evaluation of the company’s ability to repay the loan. The bank
needs to know how you will repay the funds before it will approve
your loan. Capacity is evaluated by several components, including
the following: Cash
Flow, Payment
history, Contingent
sources for repayment
capital - A
company’s owner must have his own funds invested in the company
before a financial institution will be willing to risk their
investment. Capital is the owner’s personal investment in his/her
business which could be lost if the business fails. The single most
common reason that new businesses fail is undercapitalization.
There is no fixed amount or percentage that the owner must be
vested in his/her own company before he is eligible for a business
loan. However, most lenders want to see at least 25% of a
company’s funding coming from the owner. Contrary to what
is advertised in the media, a bank will not fund
100% of the business venture. In almost every case, any principal
that will own more than 10% of the company is required to sign a
personal guarantee for the business debt.
collateral -
Machinery, accounts receivable, inventory, and other business
assets that can be sold if a borrower fails to repay the loan are
considered collateral. Since small items such as computers and
office equipment are not typically considered collateral, in the
case of most small business loans, the owner’s personal assets
(such as his/her home or automobile) are required in order for the
loan to be approved. When an owner of a small business uses his/her
personal assets as a guarantee on a business loan, that means the
lender can sell those personal items to satisfy any outstanding
amount that is not repaid. Collateral is considered a “secondary”
source of repayments-banks want cash to repay the loan, not sale of
business assets.
conditions -
This is an overall evaluation of the general economic climate and
the purpose of the loan. Economic conditions specific to the
industry of the business applying for the loan as well as the
overall state of the country’s economy factor heavily into a
decision to approve a loan. Clearly, if a company is a thriving
industry during a time of economic growth, there is more of a
chance that the loan will be granted than if the industry is
declining and the economy is uncertain. The purpose of the loan is
an important factor. If a company plans to invest the loan into
business by acquiring assets or expanding its market, there is more
of a chance of approval than if it plans to use the fund for more
expenses. Typical factors included in this evaluation step include:
the strength and number of competitors, size and attractiveness of
the market, dependence on changes in consumer tastes and
preferences, customer or supplier concentration, length of time in
business, and any relevant social, economic, or political forces
that could impact the business.
confidence - A
successful borrower instills confidence in the lender by addressing
all of the lender’s concerns on the other Five C’s. Their loan
application sends the message that the company is professional,
with an honest reputation, a good credit history, reasonable
financial statements, good capitalization and adequate
collateral.