Every business needs loan at some point in their existence. Ever wondered why a viable business that’s thriving with a stable financial base never gets a bank credit facility? It would beat your imagination that even with your assessment of that business’ viability, your banker, particularly from the mainstream banks, looks out for things you may not consider as being important.
Your banker looks out for the 5 C’s of lending before that loan gets approved. Where it gets tricky here is that all the boxes in these 5 C’s must be ticked to get that loan granted.
So let’s have a look:
- Character: When lenders evaluate character of an intending borrower, they not only look at it from a business perspective but also from the individual perspective. Example: questions like how long you have lived in your current location, how long you have worked at your current job(if applicable), do you pay your bills on time? Your business history is also evaluated to know your track record as regards your worthiness to repay the loan. Sometimes called Credit History, your financials are looked into to ascertain how you handled previous credit facilities (loans).
- Capacity: Your banker measures your ability to repay the loan by comparing your income to your recurring debts and assessing your debt-to-income (DTI) ratio (how much you owe compared to how much you earn). The lower your ratio, the more confident and relaxed your banker would be that you can repay your credit facility.
- Capital: The value of your assets minus your liabilities (what you own minus what you owe). No banker finances any investment 100%. You must have a stake (capital) in it. Have in mind that your banker puts into consideration your contribution to any potential investment, as a large contribution from you reduces the risk of default.
- Collateral: What you stake in exchange for the credit facility you are accessing. Collateral helps your business access loan, it gives your banker the assurances that they can get their money back in the event of a default. So this is an asset your banker has right to take ownership of to repay the loan facility.
- Conditions: Here your banker looks at other external factors that may have an impact on the repayment of the loan. For instance what is happening in the local economy, the market stability, the viability of the proposed investment, the rates of the loans and a whole range of other factors.
Subsequently, we would evaluate each of these factors in broader details.
Now you know, it would be easier accessing a loan if you tried ticking off these boxes yourself before approaching your banker.