Will a lender approve your application for a loan? The determination for your denial or approval is based on several factors. What you know about credit and the lending institution before you apply is important.
Study the following Six C’s of Credit before you devise your plan for applying.
Potential lenders estimate chance of a default and risk of financial loss by looking at information about the loan, as well as your credit reports, income statements, and other documents relevant to your financial situation. Most traditional lenders believe in a time-tested framework called the five Cs of credit: character, capacity/cash flow, collateral, conditions and capital. Different lenders may place more value on one characteristic over another. Understanding these five characteristics helps you anticipate your strong and weak points from a lender’s point of view so you can improve your chance of approval. We've added a 6th C - communication.
1. Character
This is a lender’s opinion of a borrower’s credibility. What is the credit history of this individual? That is the first question the lender is interested in. The lender will assess your work experience, credit history, credentials, references, reputation and interaction with lenders. To the potential lender, character means that you will make every possible effort to repay the loan. Your personality also may be taken into consideration. When planning ahead build a relationship with your banker to learn the kind of criterion the institution must have for approval.
2. Capacity/Cash Flow
This is the borrower’s ability to repay the loan? Will your new business generate the cash flow to repay the loan? Lenders not only look at the business’s financial projections, but also at your current outstanding debt obligations compared to your income. They assess your ability to repay the loan if the business does not work out as planned. Do you have outside income (investments, a working spouse)? Would you be able to return to the work force in a similar capacity as you currently have? Do you have other skills that could produce income? Be prepared to provide solid answers to these questions and be able to offer real evidence.
3. Collateral
This is the assets that are used to guarantee or secure a loan: accounts receivable, inventory, cash, equipment, real estate, life insurance policies, marketable securities are all forms of collateral that banks leverage to secure business loans. In addition to looking at the value of your collateral, the bank will consider any existing debt you may still owe on that collateral. Will your collateral cover the loan? Is the collateral adequately insured? Is the collateral marketable? In the past, a co-signer was considered as collateral for many small business ventures. However, banks and traditional lending institutions now look less favorably at co-signers as collateral. You can use your home or other real estate, cash value of life insurance policies or marketable securities as collateral for business loans. However, before borrowing against these items, you should carefully consider the consequences of the worst possible situation, such as the business fails and you are forced to liquidate. Choosing the right business structure and forming a legal entity can mitigate that risk and help protect your personal assets from being seized by a lender if you are sued or if a lender is trying to collect.
4. Conditions
Conditions are those external factors over which the borrower has little or no control. The lender wants to lend to businesses operating under favorable conditions. In their aim to identify risks, the lender will look at the nature of your product or service in terms of industry trends, state of the economy, prevailing interest rates, conditions or trends in your community, the seasonal character of your business, industry specific legislation, and political change. The lender will want to know if the current conditions will continue, improve or deteriorate. Other factors entering the decision-making process might be whether the lender may have already invested in a competing business and how much competition there is in your market. Be prepared to tell the lender how you plan to deal with these conditions, how you have assessed these various conditions and how your business will weather economic changes.
5. Capital
Lenders refrain from putting money into a new business unless they have concrete evidence that the owner has made a sizable financial commitment to the business. New small businesses fail at a rapid rate and when they do fail, it is difficult to turn the assets into cash for repayment of the loan. They know from experience that if your own money is involved, it gives you added incentive not to default on the loan. You should expect to invest from your personal resources a much higher percentage of the needed capital. Be cautious. Consider what you can afford to put at risk.
6. Communication
Communication, or more specifically your willingness to openly and frequently communicate with your lender and other key advisors about opportunities, challenges, and problems (when they arise) is key to a productive financial partnership. Communication sets the tone of your relationship with your lender and also can be a determining factor in the kind of terms, arrangements, renewals, or references you receive moving forward.
When you aspire to be an entrepreneur and need funding to get your business started, how and when you approach a lender may be critical to qualifying for a loan. Here’s some guidelines to consider:
You need good credit to qualify for financing. While there are lenders who cater to a credit newbie for a business venture, it can be a challenge to find financing, when lack credit experience and possess little proof of early success.
Building credit takes time. You have to have patient and above all practice responsible credit habits.
Practice Responsible Credit Habits
Your credit score comes from the information on your credit reports. Once you open accounts with utility, telephone or credit card companies they will submit reports to the credit bureau and your payment history will show up on your credit reports. If you have managed those accounts responsibly you have already made a good start. Your landlord may also report to the credit bureau.
A Good Credit Score does not Happen Overnight
There are other strategies you can use that might give you a head start. However, every opportunity for credit also adds another payment to your debt-servicing ration which also dips into your cash flow and affects affects your capacity to qualify for a business loan. That is why it is important to sit down with a favourable lending institution that caters to your type of business and garner advise on what is best in your circumstances. Your banker may advise that you need a responsible co-signer, which is beneficial for you, but has disadvantages and legalities for the co-sginer.
Crowdfunding is a Potential Solution
Once you have a solid business plan in place you could explore crowdfunding to jump-start your business. Friends, family and strangers invest in your business or product idea. You may even find an industry specific, crowdfunding platform that fits your niche.
Canada Versus International Credit
Keep in mind that different laws apply to Canada than other countries. Be careful. That is another good reason to speak with your local lending institution to learn the best approach to getting the financing you need to start or buy your own business.
As a small business owner
you should assess whether you are sourcing enough good ideas from outside your
immediate think group. The more ideas generated, the greater the chance of
finding innovative ways to combine them into something new.
Inspiration can strike when you least expect it, but that is rather an inefficient way to drive innovation and creativity. Want a do-it-yourself approach to decision-making and problem solving? Try one of these brainstorming techniques to develop your ideas.
Professionalism is what you do visibly that impresses and inspires others and what you do behind the scenes – integrity, self-regulation, conscientiousness – that allows you to fulfill your role to the best of your ability and gives you a sense of satisfaction and self-worth.
When you are overworked and under pressure, try these two super easy-to-implement strategies to fend off procrastination. They can be completed quickly and more importantly they work best to set the tone for an excellent day.
Kindness should extend to our colleagues and work family. In the workplace, kindness is a catalyst that helps to build trust, drives morale, improves well-being, engagement, and productivity. Kindness makes you feel good and that is a good way to spend your day.
As a professional, you want to get the job done – and done well. You do what is necessary to produce results that exceed expectations. You recognize whatever you do to keep advancing personally and professionally also helps your business to thrive.
