The 4 C’s of credit. There are 4 C’s that the bank looks at to determine your credit worthiness. Those are Character, Capacity, Capital and Conditions.
Bank looks at your character by your past performances. How you handle your financial affairs, business and personal accounts. After all, would you extend credit to some one who has a history of late payments, no payments and defaults? Please remember that no matter how good your cash flow and cash position, a bank will quickly reject your application, if your credit history is sub par. Clearly, then, the wise business owner will ensure that his/her business dealings are also building good character and integrity.
Character is most often determined by looking at the credit history, particularly as it is stated in the credit score (FICO score). Factors that will affect your credit score include: Late payments, Delinquent accounts, Available credit and Total debt. This might just be the most important C of credit.
Capacity refers to the ability of the business to generate cash flow in order to pay back the loan. New business having no track record is considered a risky investment for the bank. You really have to prove the math in your business plan if you are a new business. But, If you are buying an existing business, capacity is easier to determine because business that can show a positive cash flow (where income exceeds expenses) for a sustained period of time has a good chance of getting a business loan.
Capital is the next C. Banks are security conscious; so having capital (assets) helps the bank feel more secure. In addition, having capital can substantially reduce your cost of borrowing. Every business has assets, whether it be accounts receivable, inventory, equipment etc. . When you sit down with a banker, make sure you discuss collateral use it to your advantage. Bank consider capital, but with some hesitation, because if your business folds, they are left with assets that have depreciated and they must find someplace to sell these assets, at liquidation value. You can see why, to a bank, cash is the best asset.
Conditions are the state of the business you are representing. Right now banks will be hesitant to give building developers loans to develop housing units because of the real estate downturn. But if you are representing a business model that has a good ability to repay thier loans and your field is booming then chances are good that you can get a loan. Private dental offices have a much easier time getting business loan according to some business bankers.
So build your character, capacity, capital and wait for the right conditions to apply for a business loan. If you do your homework then you will succeed.