Thinking of borrowing funds for your business? Remember the 5 C's!

Yes, banks have been around a long time and have survived everything from train robberies to the Great Depression to the Great Recession. And you have a business that needs additional cash to help with its growth. So how can you win a loan into today's uncertain economy? It goes back to basics. 

 

Back in the days, oh so long ago, when money was flowing much more freely, back in 2005, banks still looked at that they call the 5 C's - character, capacity, capital, collateral and conditions like they do today. The only difference with their view today is that their glasses are focused about 30-40 years in the past. Bottom line: you have to meet the bank's guidelines in order to get funded.

The first C is Character. This refers the skill set of the management team, who are the managers, has anyone filed for bankruptcy or had any other business issues in the past. Today, ideally banks would like to know that you have had some business management experience as well as industry experience. How much do you ask? It all depends. On the bank. On the underwriting department. On your personal relationship with your banker. You need to have experience and success with all the challenges in today's economy.

The second C is Capacity. This refers to your ability to pay back the loan. Do you have the cash flow to pay for all the other aspects of your business AND pay the principal and interest on your loan? What do they look at? It all depends. On the bank. Mostly they look at prior year's tax returns for you personally and the business, as well as projected financial statements. Be careful with your assumptions.

The third C is Capital. How much "skin" do you have in the game? How much have you invested of your own money in the business? How much can you potentially lose if the business fails? The bank wants to know that you are a very interested party in the success of the business. How much of your money invested kinda has a way of doing that. How much? It all depends. On the bank.

The fourth C is Collateral. What asset do you have to pledge to the bank in case you default on the loan? What is the condition and value of the asset? How much collateral do you need? It all depends. On the bank. Some banks may require that you fully collateralize the loan. Ask what their requirements are.

The last C is Conditions. These are economic conditions in your industry and the economy in general that can affect your business. You probably have little or no control over this C. Do your best to know what the leading indicators of success are for your industry and your businesses operating region. Are you local, regional, national or international? You better know what types of risk affect your business. What risks are measured? It all depends. On the bank.

We hope that you've gotten the gist of this post. It all depends. On the bank. Big bank, regional bank, community bank - they all look at things different and you need a bank that is a financial partner, so please consider all the options before you start going through the brain damage of filling out loan applications and gathering required paperwork. And know that we at the BRIC are always available to help.