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Five C's of Bank Financing

Do you know what banks look for when lending to entrepreneurs? If you don't, then it's time you learned the 'five C's.'

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The basic bank term loan is still one of the cheapest, most popular ways to finance a business. Term loans typically have fixed interest rates, monthly or quarterly repayment schedules, and a set maturity date. You will have to put down 20 to 25 percent of the total you want financed, because the banks want you to carry some of the risk. What do banks look for when deciding to make loans? The "five C's" are of the utmost importance:

1. Character: How have you managed other loans (business and personal)? What is your business experience? If you're a corporate executive and want to open a restaurant, you'd better have some restaurant experience.

2. Credit capacity: The bank will conduct a full credit analysis, including a detailed review of your financial statements and personal finances.

3. Collateral: It's the primary source of repayment. Expect the bank to want this source to be larger than the amount you're borrowing.

4. Capital: What assets do you own that can quickly be turned into cash if necessary? The bank wants to know what you own outside of the business--bonds, stocks, apartment buildings--that might be an alternate repayment source. If there is a loss, your assets are tapped first, not the bank's. You will most likely have to add a personal guarantee to all of that, too.

5. Comfort/confidence with your business plan: How accurate are your revenue and expense projections? You can expect the bank to make a detailed judgment. What is the condition of the economy and the industry?

Pay attention to the following "red flags," which make a banker less likely to lend to you:

  • Poor credit reports: If your credit report is blemished, the bank will naturally wonder why you would pay it on time when you have failed to do so for others.
  • Absence of a down payment: If you don't have a down payment ready, expect the bank to assume you have not thought ahead.
  • Poor collateral: Banks want to see liquid assets, which will be assessed on their market value, not on what you paid for them or what you think they're worth.
  • A poor business plan or none at all: Make sure you have one, and be sure it's realistic.

Excerpted from Where's the Money? Sure-Fire Financing Solutions for Your Small Business (Entrepreneur Media) by Art Beroff and Dwayne Moyers