How Lenders will Evaluate Your Creditworthiness
For many business owners, getting a loan will be essential at some point. Whether it is during the business startup, during an expansion, or simply due to a temporary loss of profits, business loans are important for keeping a business up and running. Creditworthiness is an essential part of getting a business loan, and it is important to know what lenders are looking for when evaluating yours. Generally, they follow the 5 C’s: Character, Capacity, Capital, Conditions, and Collateral.
To evaluate your character, your lender may look at your personal credit score to see if you can make your payments on time and avoid using all of your available credit. Maintaining a healthy personal credit score will make lenders more likely to give your business a chance with a loan. Your character can also be determined by the way you interact with the lender.
Capacity is also known as your cash flow. This will help determine your ability to repay your loan. If you are having cash flow issues in your business, you are less likely to get a high loan amount, or you may have a higher interest rate since you are considered high risk. An accountant can work with you to help you obtain positive cash flow.
Capital is an important part of your loan application; the lenders will want to see if you invested any of your personal capital into your business and they will look on your favorably if you have. This tells them that you are serious about your business and willing to put your personal money into making it grow instead of depending entirely on money from them, increasing your creditworthiness.
Conditions as a borrower are affected by your plan for the loan and how stable your business is. Make sure your lender knows exactly what the loan is going toward; expansion, paying employees, etc. The plan for the loan as well as how your business is going will help determine if you are high risk.
Collateral applies if you are getting a secured loan, and it is offered for in the event that you cannot repay your loan. This can be any asset that the lender can repossess, such as real estate, inventory, equipment and even your house. Even if you get an unsecured loan, it is still possible for a lender to take collateral if you default. If you are looking to get a business loan, be sure to speak to an accountant for help with finding one and increasing your creditworthiness.