When you apply for a business loan, you’ve got to complete a lot of paperwork. And that’s only the beginning. After you complete the application package, it goes to the lending institution’s loan committee. Your banker may not be on the committee, so your package should stand on its own. Better yet, it should stand out from the other applications.
So how can you increase the chances that the loan committee will recommend approval of your credit application? By excelling at the “five Cs” of business credit — criteria banking-industry professionals consider very important. The five Cs are:
- Character: This includes your personal history, reputation, and (often) your relationship with the lender.
- Capacity: This refers to the cash flow, liquidity, asset/liability structure, and net worth of the borrower and guarantors.
- Collateral: Your loan should be adequately secured by collateral that is acceptable to the bank, at an acceptable margin.
- Capital: Lenders want to see a proper capital structure that doesn’t leave the bank with undue risk exposure.
- Conditions: You should be able to demonstrate a thorough understanding of relevant industries, the economy, and any other related conditions.
The five Cs are the elements loan committees evaluate in order to mitigate their risk. They don’t ensure that all the loans banks take on are 100 percent risk-free. Rather, they help to identify where the risks are, to determine if risks are layered with other risks, and to spot areas of strength that can reduce risks that may be present.
There are three steps you can take to encourage a favorable review of your application:
- Communicate your business plan clearly.
- Make it evident that you have a solid plan for using the funds.
- Provide high-quality, current financial information.
Having a detailed, complete application is also important. Many committees look for seven basic elements during reviews. These elements are straightforward but often overlooked by potential borrowers:
- Be specific about how you plan to use the funds. “Working capital” is not an adequate explanation.
- Show a well-defined source of cash repayment, supported by documented performance.
- Define two or three alternate sources of repayment that do not involve liquidation of the pledged collateral.
- Provide an analysis of collateral throughout the term of the loan, in terms of value and liquidity.
- Include a solid, objective analysis of all risk factors, including a believable “worst-case scenario.”
- Summarize the qualifications of the guarantor, including relevant risk analysis, to demonstrate that the guarantor is a willing and capable source of repayment.
- Anticipate questions from the committee and provide concise, credible answers.
Finally, take the time to get to know a number of banks and pursue partnerships that foster loan approvals, bank relationships, and mutual future growth.
And never forget that even in today’s numbers-heavy financial world, bank references still supersede credit scores.
Janet Arrowood is managing director of Write Source. She can be reached at firstname.lastname@example.org.