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The Big Five

The three elements lenders look at before they hand over the cash
- Magazine Contributor
2 min read

This story appears in the July 2000 issue of Startups. Subscribe »

Q: Since money sources are financial types, all I need is a good set of numbers, right?

A:Not exactly. Lenders and investors look past the surface numbers to the intangibles of character, capacity, conditions, capital and collateral.

Character is about honesty, integrity and persistence. Your credit record, work record and personal lifestyle, as reflected in your personal financial statement, are scrutinized. Never conceal debt or overvalue your assets. Order your personal and business credit reports before seeking financing. Clear up errors and put your explanation on record for any disputed items. Include in the financing proposal your explanation of any accurate negative credit information. Otherwise, when it's uncovered, you are presumed to be a liar. Past behavior is a predictor of future behavior. Have you encountered personal and business problems in the past? Did you keep your word? Meet your obligations? Applicants who fail the character test do not get funded.

Capacity is what you can do. What skills, education, experience, drive and contacts are needed to enable repayment of a loan or achieve company growth such that investors can capture a 35 percent-plus return? Does your track record, education and training show that you and your management team have these skills? Investors specialize in selected industries because they know what to look for in management. Whereas banks like to see steady, controlled growth, investors need very rapid, above-average growth.

You must also describe in detail those business "key success factors" necessary for profitable growth. For example, promising "better service" is not enough. How do you plan to deliver better service?

Conditions are externals impacting your business that you cannot control but to which you must respond. They can be threats or opportunities such as technology, competition, regulation, and economic or social changes. Your response to judgemental conditions should be strategic planning. The banker focuses on threats; the investor looks for opportunities. Neither wants to deal with internally focused companies likely to be blindsided by external factors. Lastly, you must include an analysis of competitors and how you create and maintain a competitive advantage.

Next month, I'll cover collateral and capital.

George M. Dawson on ( is a small-business consultant and author of Borrowing to Build Your Business: Getting Your Banker to Say "Yes" (Upstart Publishing, $16.95, 800-235-8866) Send him your financing questions at