Borrowing money and the financial 4 Cs
It is often said that small business people have difficult time borrowing money. This is not necessarily true. Banks make money by lending money. However, the inexperience of many small business owners in financial matters often prompts banks to deny loan requests. Requesting a loan when you are not properly prepared sends a signal to your lender. That message is: High Risk! To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be able to convince your lender that you are a good credit risk.
The financial 4 Cs - Credit rating, Capacity to repay, Capital and Collateral - listed below, include the criteria lenders will weigh heavily when considering you for a loan. Paying attention to these areas and ensuring they are in good shape will save you many headaches throughout the financing process.
| Credit rating |
The degree to which a borrower feels a moral obligation to pay his/her debts, measured by the credit and payment history.
|
| Capacity to repay |
A subjective determination made by a lender based upon an analysis of the borrower's financial statements and other information.
|
| Capital |
The amount of capital in a business is equal to the total of capital from debt and equity. Lenders prefer low debt-to-asset and debt-to-worth ratios and high current ratios. These indicate financial stability.
|
| Collateral |
An asset owned by the borrower, but promised to a lender against non-payment of the loan. The amount of collateral varies from lender to lender. The closer the collateral value is to the loan amount, the more comfortable the lender will be that the loan will be repaid.
|
Your banker can assist you in preparing to apply for a loan. Additionally, he or she will have a good working knowledge of the economic and business picture in your area. They will be able to draw on their own experience to provide you with information on area business trends and practical advice. Take great care in choosing a bank and a banker because a strong relationship with your banker from the beginning will prove to be a most valuable asset. Listed below are some dos and don'ts that can help strengthen the relationship with your bankers:
DO
- Make an appointment and allocate enough time.
- Tell it straight, good and bad.
- Be prepared.
- Ask questions if you don't understand something.
- Have a definite plan but be flexible.
- Keep your banker informed.
- Negotiate rates after presenting the loan request.
DON'T
- Be impatient.
- Make promises you can't keep.
- Ask "how much" you can borrow.
- Negotiate interest rates over the telephone.
- Spend money before you ask for it.
- Change banks solely for a better interest rate.
- Ever surprise your banker.