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.'

By Dwayne Moyers

Opinions expressed by Entrepreneur contributors are their own.

The basic bank term loan is still one of the cheapest, mostpopular ways to finance a business. Term loans typically have fixedinterest rates, monthly or quarterly repayment schedules, and a setmaturity date. You will have to put down 20 to 25 percent of thetotal you want financed, because the banks want you to carry someof 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 (businessand personal)? What is your business experience? If you're acorporate executive and want to open a restaurant, you'd betterhave some restaurant experience.

2. Credit capacity: The bank will conduct a full creditanalysis, including a detailed review of your financial statementsand personal finances.

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

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

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

Pay attention to the following "red flags," which makea 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 whenyou have failed to do so for others.
  • Absence of a down payment: If you don't have a downpayment ready, expect the bank to assume you have not thoughtahead.
  • Poor collateral: Banks want to see liquid assets, whichwill be assessed on their market value, not on what you paid forthem or what you think they're worth.
  • A poor business plan or none at all: Make sure you haveone, and be sure it's realistic.

Excerpted from Where's the Money? Sure-Fire FinancingSolutions for Your Small Business (Entrepreneur Media) by ArtBeroff and Dwayne Moyers

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