The 5 C’s of Business Credit
As a business consultant, I routinely help small businesses with access to capital. My role in the process is to assist with business plans, acquisition and expansion plans, strategic plans and financial projections that may be needed to accompany a funding request. Before we begin that process I always have a discussion about the 5 C’s to make sure that in addition to the business the client themselves is a worthy loan candidate.
- Capacity: How are you going to repay the loan? First we look at the cash flow of the business. Can you clearly demonstrate that it is or will make money? Most lenders require that your net income be at least 1.25 times the proposed debt. You can use a simple formula to calculate this. Net income + Depreciation + Amortization/Proposed Loan Payments (Principal & Interest). If you meet that threshold, the lender will look at payment history. This is your personal credit because lenders require a small business owner to personally guarantee a loan. Last they will look for other sources of income in your household such as a working spouse to be a “backup” sources of repayment.
- Collateral: What security can you provide? It sounds harsh but I always ask my clients “what do you own of value that they can take from you if you default on the loan?” They will not consider things like cars, boats, household items, jewelry or office equipment. They will take a lien on business assets but it is generally 50% or less of depreciated value leaving a huge collateral shortfall. Your best source of collateral is usually real estate which might be personal, business or both of them depending on the amount of the loan and the equity in the properties.
- Capital: How much money have you or will you invest in the business? Prospective lenders like to know that you have personally invested money. They also want to know that your business has enough extra capital to handle any unforeseen needs. They have a specific percentage that they require you to invest in your business and the range is 10 to 25% depending on a variety of factors so be prepared because there is no 100% financing.
- Conditions: How are you going to use the loan? Lenders will require that you provide details on how you are going to use the money and where you are going to get all the money you will need. This is a Sources and Uses of Funds Statement and you will need to provide detail/quotes/contracts as supporting documentation. Lenders will also consider the history of the business as well as the economic outlook of your industry. If the business is in a declining industry, be prepared to explain the conditions that will make yours profitable.
- Character: Who are you? Do you have experience in your industry? Have you ever managed a business or employees? What is your educational and work background that qualifies you to run this business? Lenders want to know that you have the credentials and experience to run a successful business. Be prepared to share a resume and references to back up your claims.
If the client meets the criteria of the 5 C’s, we can move on to the business planning and financial projections phase. At this time, the client might also begin discussing loan types with a lender. There are a few specialized programs for small business owners so it is best to see which one matches your needs. If you would like to discuss any of the above, you can contact Becky at email@example.com or 912-651-3200.
The SBDC along with the Creative Coast are hosting a Free Small Business Financing Forum on August 25 2017 from 2pm-4pm at the Creative Coast located at 2222 Bull St. A panel of experts will discuss several of the funding options available for your business and how to determine the best fit for your needs. Although it is free, online registration is required at georgiasbdc.org/southern.
(Source: Becky Brownlee, Business Consultant, UGA SBDC at Savannah)
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