[vc_row css=”.vc_custom_1548289356400{background-color: #bcbcbc !important;}”][vc_column][vc_single_image image=”4862″ img_size=”full” alignment=”center”][vc_column_text css=”.vc_custom_1753495727499{padding-right: 19px !important;padding-left: 19px !important;}”]As a business owner, you need to understand credit and risk and how your banker measures your credit worthiness. In this chapter, I discuss the five C’s of credit and what you need to be paying attention to.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text css=””]
Chapter 2: Understand Credit
If you are planning on borrowing money from your local bank, you should go into it with a full understanding of the principles of credit. Bankers need to gauge your creditworthiness and they look at a number of things in addition to your financials. These are often referred to as the five C’s of credit. Let us take a look at each of them.
Character
How is your banker going to know and understand your character if you have not taken steps to establish a professional relationship with him or her? What if you have never even met your banker? Relationships take time and waiting until the time you need to borrow money is too late. Bankers want to minimize the risk of default and if they do not know you or have a long-term relationship with you, you are considered to be more of a risk. Some lenders consider your character as the most important decision-maker for them. Your character involves your prior business experience within the industry, your credit history, referrals, and references as well as your standing within your community.
Bankers will want to review your personal and business credit history before loaning you any money. It would be good for you to take the time to review your personal and business credit history before approaching the bank to ensure that there are no inaccuracies. If there are inaccuracies, get them corrected before going to see your banker.
Capacity
Do you have the capacity to repay the loan? Banks and bankers obviously want the money they loan to be repaid and they want to see that you have the capacity to do so. If your debt-to-equity ratio is too high, your capacity to repay the debt is too low and it is unlikely you will get a loan. It is important for you to understand this ratio, not only on an ongoing basis as you run your business but also before you engage your banker to borrow additional funds. Bankers tend to loan at a 2:1 ratio, meaning they will loan two dollars for every one dollar of equity in the business, depending on your credit worthiness.
Capital
What kind of capital are you willing to put toward securing your loan? Any contribution by you the borrower helps to reduce the risk of default. Do you have personal wealth or assets that can be used as a secondary repayment source through the sale of the pledged asset? That is not much different than being required to put down 20 percent on a new home you are buying. The down payment on your home indicates how serious you are, which makes the lender more comfortable and more willing to make the loan.
Collateral
Do you have both business and personal collateral invested in your business? In other words, do you have skin in the game? Are you maxed out and leveraged to the hilt or do you have room to borrow additional funds? How good are your accounts receivables? How much cash do you have? What is the status of your inventory and hard assets within the business? These are questions you should be able to answer.
Conditions
What are the current conditions in the economy and your industry? What are the current trends and are they trending in your favor? Or is government regulation or other issues out of your control going to affect the business’s ability to repay the loan? Who is your competition? Have you analyzed your competition’s strengths and their weaknesses? How will you differentiate your business from the competition? Having an understanding of the conditions within your industry and the economy as well as being able to discuss these with your banker will give him or her confidence in your ability to manage your business. Conditions can also refer to how you, the borrower, intend to use the funds.
Aside from these five C’s of creditworthiness, another major factor is trust. All relationships are built on trust including banking relationships! Bankers have to trust that you have supplied current and accurate financial information. They have to trust that you have been truthful in how you have described your business, its current state and the desired future. Bankers want to know that you have a plan on how you are going to utilize the funds being borrowed and how you will pay them back. By consistently doing what you say you are going to do, you can build trust.
The bankers I interviewed want their customers to have a deep understanding of their financials as well as an understanding of debt and what that means for the business. They do not want to lend to business owners who are flying by the seat of their pants.
Your banker wants to know that you not only have the necessary experience but that you know what you are doing and take business seriously.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Make Your Banker Happy
10 Keys to Unlocking a Good Relationship with Your Banker
The various aspects of your business are like links in a chain, and your banker serves as one of those links. Because any chain is only as strong as its weakest link, it’s vital to develop an excellent working relationship with your banker, even to the point where your banker is a trusted advisor. In this book, a leading consultant who helps his clients generate dramatic results you will show you the keys to unlocking a good relationship with your banker.
As a business owner, your relationship with your banker is essential to your success. Follow our series on the website and get your desktop reference copy from Amazon.[/vc_column_text][vc_single_image image=”4854″ img_size=”full” alignment=”center”][vc_column_text]
[/vc_column_text][/vc_column][/vc_row]
--- END POST ---