Starting or growing a business requires the acquisition of funding, which is most often sourced through credit. Lenders use the 5 C’s of credit to determine whether a borrower is safe to lend to and what level of interest to set.
As the founder of several businesses, I have experience in sourcing credit and improving a business credit score. You can discover more of my business advice by visiting the Ahmed Dahab Facebook page. The infographic attachment also has some tips on ways to improve credit scores.
When deliberating whether to offer a business loan, most lenders will evaluate the 5 C’s of lending.
Banks and other lenders evaluate the character of the borrower as part of the process of understanding how likely borrowers are to repay their debt. This includes looking at how previous debt obligations have been handled, checking credit scores, and looking at all aspects of credit history.
Capacity measures the ability of the borrower to be able to meet the repayment terms. Lenders will want to check cash flow and access information about any other debt obligations the borrower already has to ensure there is enough money coming in to be able to cover the repayments.
A definition of cash flow can be found in the embedded short video.
Lenders are usually more willing to lend to businesses if the owners or management of the business have already invested some of their own capital into the company, as this demonstrates serious investment in the success of the venture.
Banks and lenders will want to know how the money from any proposed loan will be used and any conditions that may affect the business during the term of the loan. These conditions include the current economic environment, market conditions and the industry sector. They will then look at how those conditions could potentially impact the use of the money.
Most types of business loans are secured, which means the borrower needs to have collateral that they can put up as security to guarantee the loan. If there is not sufficient collateral in the business, lenders are less likely to see the loan as a safe bet. If loan repayments are not kept up with, the lender has the right to seize the collateral in exchange of non-repayment.
The PDF attachment outlines some of the most popular sources of credit for small businesses.