There are a couple of old sayings that relate to getting a loan. The first one is that bankers only want to lend money when you don’t need it. As frustrating as that is, it’s understandable, since bankers naturally want to minimize their risks.
However, you can change the odds of getting cash when you need it by gaining a clearer understanding of the lending process.
Loan officers will look for at least two sources of repayment and possibly a third:
- Cash flow from operations for short-term loans and continued positive earnings for long-term loans;
- Collateral such as a mortgage on fixed assets, accounts receivable, or inventory as a backup to the first source, and
- A personal guarantee if the lender wants a third source that demonstrates your commitment to the operation and its success.
There’s another aspect of the loan application process from the lender’s viewpoint. The loan officer is generally going to investigate how the Five C’s of Credit apply to you. Those C’s are: Capacity, Collateral, Capital, Character and Conditions.
- Capacity is your ability to meet the financial obligations of the debt and the track records of both you and the business? It’s a plus if you have experience in the same industry, preferably in management.
- Collateral is the assets can you pledge to support the primary source of repayment.
- Capital represents how much equity there is in the business and how much of your own money you’ve devoted to the project.
- Character simply means how trustworthy you and your partners are. Regardless of the financial forecast presented, the loan officer must evaluate the owners’ integrity.
- Conditions are the outlook for the economy and your industry.
The other old saying: Forewarned is forearmed. Understand the process, be prepared to explain how you fit in with the Five C’s. Be convincing and you boost your chances of borrowing the money you need.
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