The 4 "C's" of business financing
If you are considering taking out a business loan you it is important to understand that there is a great deal of preparation that needs to happen long before you meet with a loan officer. This preparation will deal with several different aspects of the finances of your business. You will need to make sure that your business meets or even exceeds certain requirements long before you begin a loan application. These requirements are known as the 4 "C's" of business financing.Here is what they are-
1. Credit score-The first thing that you need to do is pull both your personal and business credit reports (if applicable). You want to make sure that both credit reports accurately reflect your credit worthiness. This is especially important if you are seeking startup financing since you won't have any previous business credit to fall back on. You should not overlook your personal credit as your potential lender will want to know how you manage your own finances, as well.Keep in mind, that if there are problems or mistakes on your credit report it can be a lengthy and time consuming process to fix them so you should take this step as soon as you are considering applying for a business loan.
2. Cash flow projection-You will need a current and accurate projection of the cash flow for your business. Your lender will look at this closely to determine if you have the resources to repay your loan. You will need to be able to show that your business can turn income into cash. Your cash flow projection should also show what expenses that you need to pay, as well. Expect that most lenders will want a monthly cash flow that will show all of this for at least a year after the loan is made. If you are applying for startup financing you will still need to make a cash flow projection but it will just be based on your research and certain assumptions rather then on past figures. You will need to be able to show your lender that you have done sufficient research on your cash flow projection. Vague guesses or assumptions will not inspire the confidence that your lender will need to feel in order to make you the loan.
3. Capital-You will also need to be able to show any potential lender that you are not relying solely on financing to fund your business. Your lender will be looking to see what capital you have already invested in your business. It is important to understand that this capital does not have to be in the form of cash. You may have invested equipment or even inventory into the business. You should be able to prove this by having receipts or invoices that show this and prove the worth of the asset. Keep in mind that your lender will also want to do a debt to worth ratio which will be a comparison of how much money you are asking to borrow, compared to how much you already have invested into your business.
4. Collateral-Most lenders will be looking for an asset that you can pledge that is worth a lot of money in order to secure your business financing. While there is no set rule about having a certain amount of collateral most lenders will require something. Keep in mind that you can pledge either business or personal assets but if you default on the loan the lender then owns them. This can be an especially harsh reality if you pledge collateral that you cannot afford to lose.