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Getting a small business loan can help you start a business or finance an expansion. But how do you get a small business loan? It helps to think like a lender.
As you go through the process of getting a loan for your business, consider the “Financial Six C’s”, a set of criteria used by lenders to evaluate small business loan applicants.
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Getting a Small Business Loan – the Financial Six C’s
- CHARACTER. The degree to which a borrower feels a moral obligation to pay his/her debts, measured by the credit and payment history.
- CAPACITY TO PAY. A subjective determination made by a lender based upon an analysis of the borrower's financial statements and other information.
- CAPITAL. The amount of capital in a business is equal to the total of capital from debt and equity. Lenders prefer low debt-to-asset and debt-to-worth ratios and high current ratios. These indicate financial stability.
- COLLATERAL. An asset owned by the borrower, but promised to a lender against non-payment of the loan. The amount of collateral varies from lender to lender. The closer the collateral value is to the loan amount, the more comfortable the lender will be that the loan will be repaid.
- CONDITIONS. General economic, geographic and industry,
- CONFIDENCE. A successful borrower instills confidence in the lender by addressing all the lender's concerns on the other Five C's. Their loan application sends the message that the company is professional, with an honest reputation, a good credit history, reasonable financial statements, good capitalization and adequate collateral.
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