To start a new business or to revamp an existing one, regular inflow of funds is necessary. There are times when businesses face an interruption on generating revenue and avail loans to meet the requirements. Bank loans for business are riskier than other types of loans. The lenders are more careful and stricter on lending money to businesses. The lender will scrutinize personal credit history as well as the credit of the business. Poor credit or lack of credit is the factor that oblige the lenders to say no to small business loans.
Lenders look for ‘4 C’s of credit’ to determine your eligibility for a loan.
Character – Character refers to the financial history of the loan borrower. Before availing a loan, the lenders check the borrower’s track record for repaying debts. Banks usually calculate this by evaluating the credit history, as told in the credit (FICO) score. A good credit score is a crucial factor to avail a business loan. Factors that can affect your credit scores include: Late payments, Delinquent accounts, Available credit, and Total debt. As new businesses have no business credit, the lenders consider the personal credit of the owners.
Capacity – Banks evaluate the stability of business before availing a loan. They will check whether the business can generate revenues to pay back the loan. Capacity is the business’ ability to make the revenue needed to repay the loan. As the new businesses may not have a profit history to validate the same, the lenders will check for the assets that can be used to pay off a loan. If you own a business with positive cash flow, there is a good chance of getting a business loan for you.
Capital – Capital refers to any business asset that can be sold if the business collapse. The capital might include anything from machinery and equipment for a manufacturing company to store or restaurant fixtures. The lenders check this to see if the business has the liquidity to cash out if the business drops off in future.
Collateral – Collateral refers to the cash and assets a borrower can offer to secure the loan. Business owner needs to pledge its assets as security for the loan. If the business fails and the owner misses the repayments, the banks can seize the assets used as collateral. Most of the unsecured business loans do not require collateral. The asset you pledge should have more or equal value to the loan amount.
As you now know the four factors determining the credit, you can plan and apply these steps into your business. If you want to get a business loan, you need to have an excellent credit rating, prove the stability of your business, show the business assets, and pledge the assets. These four C’s can also determine the time taken for loan approval.