There are 10 primary factors that lenders consider when evaluating the creditworthiness of a small business, and they can be summed up using the 10 C’s of Credit – Tommy Shek.
These are:
1. Character
Lenders will want to know if you have a track record of making timely payments on your debts in the past, how many times you’ve been late on payments, and whether or not any bankruptcies have occurred.
2. Cash Flow
As per Tommy Shek, Lenders need to feel confident that your business is going to continue to generate enough cash flow to make loan payments in a timely manner over the course of its lifetime. This is one area where smaller businesses typically struggle, but there are a variety of ways to improve cash flow including implementing new efficiencies, seeking out new customers, or increasing prices.
3. Collateral
Businesses with strong collateral backing usually have an easier time obtaining financing than companies that do not. This may include property such as a commercial building or equipment like manufacturing machinery.
4. Conditions
Overall economic conditions are another factor that lenders will consider when deciding if it’s worth taking on the risk of lending to your business. A weak economy can be difficult for businesses of all sizes, but is particularly challenging for small businesses that lack the resources and diversification of larger firms.
5. Capital
Lenders will want to see evidence of your business’s cash reserves and other forms of capital that can help cover unexpected costs or help keep the business afloat during tough times. This may include personal savings, equity investments, or lines of credit.
6. Capacity
Your business’s ability to repay the loan is paramount to lenders. They’ll want to see a detailed business plan outlining how you intend to use the loan proceeds and how they will help your business grow. They’ll also look at your current financial situation to get a sense of your ability to make loan payments on time.
7. Covenants
Covenants are specific conditions that must be met in order for a loan to be approved, and they can vary based on the lender and type of loan. For example, some loans may require that you maintain a certain level of cash flow or equity, while others may place limits on how much you can borrow in the future.
8. Collateral Protection
Lenders will want you to remain current on your loan payments, especially for loans secured by collateral. However, if it becomes necessary for the lender to repossess or foreclose on your property due to a missed payment, they need to be confident that they’ll receive full value from the sale.
9. Capital Structure
Lenders are also interested in how your business is financed, including any outstanding debt and equity held by yourself or outside investors. They may require that certain debts be paid off or restructured before agreeing to provide additional financing.
10. Counseling
In order for small businesses to achieve long-term success, it’s important to invest in professional financial counseling services and utilize tools like cash flow projections and business planning. These can help you minimize your risk and better position your business for future growth.
It’s clear that lenders take many different factors into account when evaluating the creditworthiness of a small business. The 10 C’s of Credit are a great starting point for understanding what these factors are, and they can be used as a roadmap to improving your chances of securing financing for your business. Whether you need additional capital to cover unexpected costs or help grow your company, having strong credit will give you more options and make it easier to achieve success in the long run. So if you’re looking for funding, be sure to focus on these key areas and work on improving your credit score so that you can get the loan that you need.
Conclusion:
The 10 C’s of Credit are important factors to keep in mind when applying for a small business loan. By understanding what lenders are looking for, you can be better prepared to obtain the financing you need.
