Last week, we began a series on business finance with a beginner’s guide to early stage financing. This time out, we’re examining ways you can convince banks to lend you the all-important start-up capital you need to get off the ground.
In times past, banks took something of a free-wheeling approach to business loans. Money was handed over generously and banks were willing to take a risk on edge cases. While this meant plenty of small businesses were able to make it, banks also ended up taking a bath on some loans, forcing them to take stock and tighten their belts.
Nowadays roughly 25 per cent of people who apply for a business loan will receive one. Seems low, right? The truth is, that figure is low because a lot of entrepreneurs don’t prepare well when putting together a loan application. That’s why we’re going to take you through the steps to creating a strong loan application that will give you the best chance of securing the funding you need. It all starts with “The Four C’s of Lending.”
The Four C’s of Lending
When bank officials are evaluating a loan application, they follow a prescribed methodology to reach their decision. They’ll be grading your application on the following criteria:
- Cash flow. Your ability to repay the cash you are borrowing. This is measured using the cash flow forecast that you created for your business plan.
- Collateral. The value of assets that you are willing to pledge for assurance that you will repay your loan. A dollar amount will be placed on these assets and that will be compared to the amount of the loan you requested.
- Commitment. The amount of money that you're committing to your business. You can’t expect to obtain a loan without contributing a fair share yourself.
- Character. Your personal credit score and history with the financial institution. Your credit rating or score is calculated from your history of borrowing and repaying bank loans, credit cards, and personal lines of credit. Without a good credit rating, your loan prospects decrease significantly.
A lender will typically determine how much to lend you by evaluating your cash flow, collateral and commitment. They will then look at your existing debt and subtract that from the total to arrive at a final amount.
You may be required to secure business loans with personal collateral such as cars or houses. This is because start-ups tend to not be rich in assets.
How to Make a Good Impression on Lenders
While the above seems largely dictated by numbers and algorithms there remains a human element to the equation. Bank officials are human and do have some leeway in the decision. Often, you can mitigate a deficiency in the figures by bolstering your application in other ways. Here are some pointers:
- Have a strong management and staff in place
- Demonstrate steady business growth potential
- Highlight reliable cash flow projections
- Offer collateral
- Ensure your personal credit rating is strong
- Make loan payments on time and in full. Never miss one.
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Interested in finding out more about the business start-up experience? Contact Us and find out how we can lessen the load.