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How to demonstrate your creditworthiness to a bank

seriousmansitting26668358.jpgIf you are a small business owner, who is looking for a loan, it will be up to you to demonstrate your creditworthiness. The lender will be considering this heavily when they are determining whether or not to give you the loan. It is important to keep in mind, that when a small business applies for a business loan, a bank or other lender follows a certain protocol when evaluating the application. One thing the bank uses is known as the 5 C's of credit analysis. Lenders evaluate the small business in the context of the 5 C's in order to allocate their limited funds. You will want to make sure your loan application addresses each of these points in detail, and you will be more successful in getting your funding.

  • Capacity-From your lender's point of view, the first "C", capacity, may be the most important. Capacity refers to the ability of your small business, to repay the loan. In your loan application, you must be able to discuss exactly how and when, you intend to repay the loan. You will need to state your revenues and expenses, and you also need to indicate the amount of your cash flows, and the timing of your cash flows with regard to repayment. Keep in mind that capacity also refers to your credit history. You will need to know if you have a good credit score. Remember that the bank will look at your past repayment history, both business and personal. Also, it is critical to indicate every possible source of repayment that is at your disposal, in your application.
  • Collateral-This "C" has a distinct relationship to capacity. Collateral is defined as the forms of security that you can provide to your bank or other lender. Collateral can be buildings or equipment that is owned by your small business or by you personally, including your home. Collateral can also include a guarantee by someone else that, in case you cannot repay the loan, the other party will. It is important to understand that as money gets tight in the economy, there is an increased chance that banks will require loan guarantees in addition to collateral. You may know loan guarantees by the term "co-signer."
  • Capital-Capital is referred to as the money you have personally invested in your business. Because this is the money you have at risk if your business fails, it is also your measure of confidence in your business. For your lender, the amount of capital you have invested in your business is also an important measure of your ability to repay your business loan.
  • Conditions-This is a multi-faceted condition that can influence your loan prospects. Conditions generally refer to the overall economic climate, and external environment, surrounding the bank and the business. During a recession or periods of tight credit, it is obviously more difficult for a small business to repay a loan, and more difficult for a bank to find the funds to loan. Because of this it becomes even more important for the small business to present an iron-clad loan application to the bank. The second part of conditions refers to the intended purpose of the loan. You lender may have several questions such as:
1. Are you buying new equipment for expansion? 2. Are you replenishing working capital to prepare for seasonal inventory buildup? 3. Why do you need the money? Remember that you will need to spell it out in detail in your loan application.
  • Character-This final factor is often a subjective judgment that is made by the banker, about the prospective client. The lender will have to decide if the client is trustworthy with regard to repaying the loan, and generating a return on the investment. This is where your education and experience, comes into the picture. Your references and background in your industry will be considered, as well.
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