Lending institutions provide small businesses with money funding to aid with their business. However, they could be more peculiar about cross-checking the businesses before giving out the money. They want to ensure that they receive the money they are lending without any problem, and for that, they run a check of 6 “C’s” to determine the business’s creditworthiness. Based on the analysis, they get an insight into how much risk they are likely to take while giving the loan to you and ultimately determine how much money they will lend you.
Lenders will evaluate the creditworthiness on these 6 critical pointers mentioned below:
Capital
Capital is your financial assets and the total money you’ve invested in your business to date!
Lenders are interested in knowing how much the business owners have invested in the business to understand the commitment to the business they possess. Undoubtedly, the lender will not finance 100% of the business venture, so they make sure to know your capital before investing any amount of money. After they get an idea, they can provide you with a loan with added security that you’ll be able to pay back the loan easily.
Capacity
This is calculated by evaluating the company’s ability to repay the loan. Lenders need to understand how you can repay the loan before they approve it. These measures evaluate capacity:
- Cash flow – It is the income of the business generated in a time span of two-three years versus the money used for running the business on a regular basis. You need to present the monthly cash flow statement for the analysis.
- Payment history – It shows the history of all the payments you have made in past loans. It is looked to determine the timeliness of payments to evaluate the borrower’s creditworthiness.
- Additional repayment sources – These are the additional sources of income that the business use to repay the loan.
All this information is used for analyzing the capacity before lending the money to the borrower.
Character
Character refers to the reputation and reliability of the borrower. This is used by lenders to evaluate creditworthiness before giving out the loan. The character contains various factors that show the borrower’s ability and willingness to repay the loan. Credit history, level of education, ability to manage expenses, experience in the industry, and reputation in the business community are the indicators included in the character check.
Collateral
Collateral refers to the assets that a borrower gives as security for a loan. It provides the lender with a form of security in case the borrower cannot repay the loan. This can include real estate, equipment, inventory, personal assets of the business owner, and receivables. Pledging collateral against the loan makes obtaining a loan easy and gives the lender a sense of security.
Conditions
Condition is the economic and industry factor that may influence the borrower’s ability to repay the loan. To assess the level of risk associated with the loan, the lenders evaluate the overall economic conditions and trends in the industry.
Lenders may consider factors such as the borrower’s business plan, financial statements, cash flow projections, and management team to evaluate the condition of the business. They may also look at the state of the economy, industry trends, and any relevant regulatory or legal issues that may impact the borrower’s ability to repay the loan. It helps lenders determine whether the borrower has the ability to repay the loan over the agreed-upon term.
Communications
The last “C” stands for communication, generally referring to the borrower’s ability to communicate effectively with the lender and provide correct information during the whole tenure of the loan. The borrower must be accurate with the information they provide so as to build a strong relationship between them for a smoother loan process. This can escalate the loan process and increases the chances of approval. This also leads to more favorable loan terms in the future when you actually connect with the lender effectively.
Almost all lenders depend on these six attributes to determine the loan approval decision. They can also make use of a combination of any “C’s” to come to a conclusion. It’s best to reach out to the lender to understand their way of lending decisions and then put your efforts into one place.
Business Advance Lenders can be your one-stop solution for all your business loan needs; we, as a trusted business loan direct lender will ask for basic information for the loan application. In case you suffer from a bad credit, you can still reach out to us for a business loan. All you need to do is to provide us with the information that is genuine and you’ll get the funds transferred directly to your bank account after the approval.