Lending institutions want to lend money because it’s the way they make money. However, they only want to lend money to a borrower who is able to repay the loan on time and in full.
When lending small amounts of money under $50,000 typically the qualification depends solely on personal and business credit scores. Depending on the personal and business credit scores, they either will or will not approve the loan.
When deciding to extend credit to a business lenders use the ‘Four Factors for Lending Approval’:
Capacity
Collateral
Conditions
Character
Each of these areas helps the lender to determine the overall risk of the loan. While each of the C’s is reviewed, none of them on their own will prevent or guarantee access to financing. There are really no automatic formulas or guaranteed percentages that are used with the Five C’s. They are only a variety of factors lenders use to evaluate and decide how much of a risk the potential borrower is.
Let’s cover these 4 Factors in greater detail.
Capacity
This is an evaluation of your ability to repay the loan. Capacity is evaluated by several components including cash flow, payment history, and additional cash sources. The best way to show your capacity is with a strong business credit profile, a strong bank rating (typically a low 5), a well designed business plan and/or prior year(s) financials that show you can produce enough cash to repay the loan.
If your loan is under $50k most banks will grant an approval if you have a strong business credit rating, a favorable personal credit score, and a low 5 bank rating.
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Collateral
Heavy machinery, inventory, equipment, stocks and bonds, and other expensive business assets that can be sold if a borrower fails to repay the loan are considered collateral. One of the easiest ways to obtain a business loan for building business credit and bank credit is using the CD-Secured loan strategy.
*There are specific banks that do these types of loans that can allow you to grow your access to capital at a much faster rate.
Conditions
Be prepared to prove that the conditions are right for your business. Make sure there’s a market, an industry, positioning, competitiveness, and experience to back up your plan.
Character
Lenders have to believe that a business owner is a reliable individual who can be depended on to repay the loan. Some areas they look into include personal credit history, education, and work experience.
When applying for a small business loan, don’t forget the importance of personal relationships. Apply for a loan at a bank where you already have a positive business relationship. Also, make an attempt to meet with the person who will be evaluating your application, such as a bank’s lending officer, rather than the teller who handles your day-to-day banking transactions.
If you want to succeed in getting a loan, be sure to also check out Elements of a Successful Small Business Loan Application.
*Gain access to my private list of banks that do CD-Secured loans when you join our business credit building system.
Remember – To succeed in business, to reach the top, an individual must know all it is possible to know about that business. ~ J. Paul Getty
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About the Author
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, Business.com, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in ‘Fox Small Business’,’American Express Small Business’, ‘Business Week’, ‘The Washington Post’, ‘The New York Times’, ‘The San Francisco Tribune’,‘Alltop’, and ‘Entrepreneur Connect’.
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