When it comes to securing a loan for your business, there are five key factors that lenders consider: character, capacity, capital, collateral, and conditions. These five C's are essential for any entrepreneur looking to get a loan approved. Let's take a closer look at each of these factors and how you can increase your chances of loan approval.
Character
Character is an important factor for lenders when considering a loan application. They want to know that you have a history of responsibility when it comes to paying back loans and other debts.Your personal credit history may also come into play here. To demonstrate strength of character, you should aim to keep your debt-to-income (DTI) ratio at 36% or lower.
Capacity
Capacity refers to your company's ability to repay the loan. Lenders will want to see that you have adequate cash flow to cover the loan payments as well as all other existing business and personal expenses. If you don't have enough cash flow, you may need to look for alternative methods of raising capital.Capital
Capital refers to the assets of your company that can be used to repay the loan.Lenders will only consider liquid assets such as bank account funds, investments, and assets that they can claim. Accounts receivable are not considered capital in this case because they are not tangible.
Collateral
Collateral is an asset that can be offered as security against the loan in case the borrower defaults. Examples of collateral include cash, inventory, receivables, or equipment. As a general rule, lenders will lend up to 80% of the value of the collateral.This means that you must have 20% of the purchase amount available or an alternative means of raising capital.
Conditions
The conditions refer to how the company plans to use the money and external factors such as the state of the economy. For example, an equipment loan may be less risky for a dropshipping company than a working capital loan in a risky business environment. When applying for credit, some of the five C's are more under the company's control than others.Conclusion
By understanding and improving each of the five C's of entrepreneurship, you can increase your chances of getting a loan approved.Make sure you have a strong character profile, adequate cash flow to cover all expenses, liquid assets that can be used as capital, collateral that can be offered as security against the loan, and conditions that are favorable for both parties.
