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Do You Know the Six C’s of Credit?

May 26th, 2011 ::

By Maria Valdez Haubrich

Are you trying to get a loan or line of credit for your small business? Then you need to know what bankers are thinking when they consider your application. One key to success in obtaining the financing you need is to understand the “six C’s of credit.” Here’s a closer look:

1. Character: Bankers will consider your personal character, which includes both your personal and business credit history. Character depends a great deal on other people’s impressions of you, including your trustworthiness and integrity. The banker will consider your references (are they, themselves, of good character?) as well as your experience in the business and/or industry. Last, but not least, what kind of impression do you make on the banker?

2. Capacity: Does your business have the ability to repay the money you are borrowing? Bankers don’t want to lend you money if it won’t have a positive result on your company; nor do they want to throw good money after bad with a loan that will just maintain the status quo. They want to see growth as a result of their investment so that they can get their loan back with interest. How soon will your business show a profit as a result of the changes you plan to make with the loan proceeds? Will the profit be sustainable and how big will it be? These are among the biggest questions bankers want answered.

3. Capital: How much capital do you and your business already have? The saying “it takes money to make money” applies here. Bankers will want to see that you have personally invested in your business and are willing to invest more. If you aren’t willing to put money into the business, why should they be? They also want to see that your equity in the business is growing.


4. Collateral: Collateral is extremely important in getting a small business loan. The bank will want to see that, in case the profits you project from the business don’t pan out, you have a “backup plan” for how they will get repaid. This can include a secondary source of repayment; a guarantee from a third party; or assets owned by you or your business. Intangible assets like goodwill or expertise don’t count; banks want to see tangible assets such as equipment, property, inventory or accounts receivable that could be sold to pay off the loan if necessary.

5. Conditions: This refers to the loan terms, including how much you are requesting, the length of the loan and the purpose you intend to use the money for. Conditions also encompass the current economic state of your industry and your region. For instance, if you own a restaurant and the restaurant industry as a whole is struggling, you will have to work extra hard to show why your particular restaurant won’t be affected by the conditions that are affecting other eateries.

6. Cash Flow: Last, but not least, bankers will want to know how the loan or line of credit will affect your business’s cash flow. How will you use the money from the loan? Have a detailed plan for what you will do and how it will help your business grow. The point is, bankers want to see that you have adequate cash flow to repay your loan.

Getting bank financing is still not easy in today’s economy—but if you have the six C’s of credit under control, you’ll greatly improve your chances of success.

Image by Flickr user Beast of Traal (Creative Commons)

The views expressed here are the author's alone and not those of Network Solutions or its partners.

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Posted in Capital Access, Raising Capital, Small Business, Uncategorized | 2 Comments »

  • Cheryl @ Day & Palin

    Don’t forget “Credit Rating”

  • http://www.adifinancial.com Steve Treadwell

    Many business owners struggle with the process of making their case to the bank.  The business and the owner may be hitting on all cylinders with respect to the C’s listed above, but they feel unprepared to make their pitch to the banker/underwriter because they lack coherent financial statements, a solid business plan, and a substantive forecast.

    Simply leaning on your CPA to communicate with the bank and present the financial status of the business is a poor tactic when trying to secure financing.

    Business owners need a strong financial partner.  A part-time CFO or a CFO on demand can provide the analytical muscle, business savvy, and strategic vision that will allow the business owner to communicate effectively with his or her banker.

    For a healthy business, the process of working with the bank should not be difficult, and the local bankers of the world are hungry for relationships with solid businesses that are on top of their financial game.

    ADI Financial provides the CFO-level expertise that a small or mid-size business must have when dealing with banking relationships.