Financial lenders look at 5 Cs before granting you a business loan

Over the years, financial lenders have developed several simple approaches to assessing the feasibility of making a loan. These approaches can be used regardless of the type or size of business involved.

By: Hitesh Khan/

If you are planning to ask for a loan, use the following factors as a checklist to improve your chances of getting the loan. The process will identify weaknesses that can be corrected before you ask for the loan.

Getting approval for a loan is a good thing, getting rejected may be even better. Even after going through this exercise, the lender may reject your loan request. However, don’t take the rejection personally. Financial lenders are in the business of making loans. But something in your request caused the rejection of your loan. Talk to the financial lenders and ask why the loan was rejected.

Financial lenders may have identified a weakness in your business that can be corrected before it causes major problems down the road.

All borrowers should examine the lender’s perspective of the loan requested and the circumstances surrounding the business owners and the business itself.

The 5Cs financial lenders look at before dishing out loans

1. Credit score – In 2010, the Credit Bureau (Singapore) introduced blended score to help banks better assess SMEs’ creditworthiness. The score blends business owner’s credit data, company’s tradelines and public registry data to increase credit risk transparency of small and medium-sized enterprises (SMEs) with a view to lessening the challenges they face in obtaining financing.
   In partnering with FICO, Credit Bureau (Singapore) developed a credit risk score that factors in the credit performance of both the business owner and his company, known as an “SME Blended Score”. Supported by SPRING Singapore, the scoring system is the first of its kind in the Asia Pacific to assess SMEs’ creditworthiness and is aimed at helping banks to make more informed credit decisions and SMEs to increase their access to financing.A good score can also enhance SMEs’ creditworthiness and increase its access to trade credit.
2. Competency – Does the individual have a thorough understanding of the market and industry in which he/she will be competing?  Does the borrower have industry contacts and know the industry players?  Does the individual have experience in starting and running a business?
3. Character – Does the individual display characteristics of honesty and integrity?  Borrowers should present themselves as upstanding, responsible members of the community and be able to back up this claim with references. Borrowers also need to show they can be trusted to be up-front and transparent about problem areas.
4. Commitment – Is the individual committed to the business ventures and willing to do what is necessary to make it successful and repay the loan?
5. Track record – Does the individual have a track record of successfully starting new businesses or did past attempts fizzle?  Does the borrower have a track record of loan repayment?

Besides the 5Cs, there are other factors which affect the outcome of your business loan application

1. Returns (cash flow) – Will the use of the loan funds create sufficient returns (cash) to repay the loan? Remember that the returns must first cover all of the costs associated with the project or business before funds are available for loan repayment. You may need to create a cash-flow budget to show how the loan funds will create sufficient cash flow to meet the loan principal and interest payments. It is also important that the timing of the cash flows correspond to the loan repayment schedule. If the loan will not create an income stream, describe and document how the loan will be repaid.
2. Risk – What can go wrong with the project or business? What is the probability that something will go wrong? Is the business sufficiently capitalized to handle risk?  What risk management strategies are available to help mitigate the risk? Are there contingency plans in place to mitigate risk? Are there alternative sources of cash from which payments can be made?
3. Collateral – Financial lenders often want protection in case of default on the loan by the borrower. Financial lenders may use the property being purchased as collateral for the loan. Additional collateral may be required as well as a personal guarantee by the borrower or other representative.

The Business

1. Track record – If this is an existing business, what has been the financial track record of the business over recent years? Does the business model seem viable and profitable?  Have sales increased?  Has equity grown?
2. Leverage – Can the business take on additional debt and maintain a reasonable debt-to-asset ratio?  Is the business positioned to adequately meet its loan repayment requirements along with covering the other financial demands of the business?

The Circumstances

1. Industry – The state of the industry in which the borrower will operate is also important to the lender. Is it a new and expanding industry or a mature and stable one? The lender will be interested in who your competitors are and your strategies for competing with them.
2. General economy – What are the conditions of the general economy at the time of the loan request and the projected state of the economy for the coming several years (during the repayment period of the loan)? Are there societal trends that will affect the viability of the business and loan repayment capacity? Will impending regulations create problems?

How to Secure a Business Loan Quickly

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