5 Cs of Credit
 

  1. Character: How is your credit? Why can be trusted with depositor's money? A strong credit score is required to obtain access to capital. Most lenders have floors for credit scores around 650 to 680. A 660 credit score should be accompanied with other exceptional factors to secure a loan. Even when you think you possess other strong factors, a bank may disagree. The best advice is to have a credit score above 700.

  2. Capacity: What have you done in your life to prepare you to run the small business you have chosen? A lender will want to make sure that the person in charge of the business decisions understands the pitfalls and risks of a business. It is crucial that you possess the experience of managing a business like the one you want to start. When you have no experience within the field, a high-quality franchise can train you to run the business. Go here to search for an SBA registered franchise http://www.franchiseregistry.com/.

  3. Capital: You have to put up 10 to 50% of total project costs as a down payment in order to secure a business loan. Different loan programs require different amounts of capital injection by the business owner. The lender wants to know you have a stake in repaying the loan too. Call your local Small Business Development Center to ask about capital requirements. Be prepared to put up 20 to 30%.

  4. Collateral: Collateral is the security a lender seeks in case a borrower defaults on a loan. Land and buildings hold value and are seen as strong collateral. Equipment depreciates at varying rates, so some equipment is strong collateral and some is not. Inventory, build-out, and working capital are weaker forms of collateral. Inventory may be deeply discounted as collateral if finding a potential buyer is difficult. Build-out of a rented property or working capital is basically unsecured unless another asset can be collateralized. The more risk that a lender takes on, the higher a reward they need. It can either come in the form of a higher interest rate or more collateral to secure the loan.

  5. Conditions: How will key economic conditions and trends help or hinder you? How will you respond to technological change, new substitutes, foreign competition, discounters, and new manufacturing methods? Who are your major suppliers and customers? What economic conditions and trends are affecting them? Who is your chief competitor? Why do they do well? What sets you apart? Avoid talking trash about competitors. It doesn’t impress a lender.