The 5Cs Of Credit: Small Business Loans - YouTube

Today's Maverick Minute, the 5Cs of credits...

Understanding what lenders look for when you apply for a small business loan

helps you stack the odds in your favor..

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The 5Cs is a system that lenders use to evaluate

your business’s creditworthiness and ability to repay a loan.

They look specifically at these five characteristics:

#1, Character…

Or sometimes called credit history, It refers to your reputation and your

trustworthiness to repay a loan. Banks assess their confidence in you through

factors like your time in business, credit score, credit reports, personal qualities and financial reputation.

So how might you improve this?

Try to raise your credit score before applying for a loan. Understand your

credit report so you can explain anything negative and help the lender

understand your business situation. Always be professional and kind. And,

if you are looking to get a traditional business loan from a bank, establish

a good relationship with your banker.

#2 C is Capacity…

Capacity… or cash flow, is your ability to repay the loan. Not only do lenders want to see you

have a history of paying your loans on time, they need to see you actually have

the cash flow to do so.

How to maximize your business’s capacity?

Pay down past debt-- this will increase the amount of cash flow available for a new loan.

Improve your DSCR, aka Debt Service Coverage Ratio--the more

you have cash to invest, the more likely you’ll be approved for the loans you want.

Lower your debt-to-income ratio as well. And, use accounting software to

prepare a strong application. It’ll also show that you are organized and responsible.

#3, Capital…

...is the amount you have invested in your company.

Lenders see capital investments as a sign that you take your business seriously.

They want to see how much of the owner’s capital is invested in the

business, and HOW that capital is invested. Here’s what to do to improve capital…

First of all, make sure you actually have money Invested in your business.

Next, highlight your investment successes so lenders will see your

business experience. Now, if you don’t have any capital invested, you’ll need to

show lenders your commitment in other ways, like with a solid business plan for example.

Collateral is the 4th of the 5Cs.

It is the asset - or assets - that are offered up as insurance against you paying back your loan fully and on time.

If you default, the lender can seize the collateral to make up for their losses.

Some examples of collateral include property, vehicles, equipment, and savings accounts.

You may be asked to sign a personal guarantee--I Recommend you

watch our video about this!

There’s no one right way to improve your business’s collateral since

each lender has their own way of evaluating collateral.

You will want to make sure you carefully evaluate your assets and their value, and,

decide if you are comfortable if asked to sign a blanket lien or personal guarantee.

These arrangements are not right for every business. Do your research!

And finally, the 5th C is Conditions.

Lenders look at several conditions when deciding whether to approve your loan. Conditions such as:

Interest rate, principle, the economy, your business’s industry, and your business’s competitors.

You may not be able to control the economy, but you can

have a plan and show the lender exactly how you will use your loan. And try to

time your application. Consider applying for a line of credit when the economy is good and business is booming.

Also, don’t be shy about showcasing your expertise

about your business and its market. And if the economy is poor, do what you can to improve your DSCR.

Now that you know the 5Cs, you can start mastering character, capacity, capital, collateral, and conditions

to impress lenders and secure the loan you want.

Click the links below and see you next week!

If you aren’t sure what DSCR is, we have a video about that too. Check it out!