Fort Simpson- Most business owners have never even heard of the expression "the five C's of credit." Yet it is the tool used by most lenders in appraising any business loan application.
Knowing these five C's can improve your chances of getting a loan or at least properly preparing for a business loan application.
Capacity -- Does the business have the ability to repay the loan? The capacity to repay will be based on current and projected cash flows. The risk factor will increase if there is no historical financial information to rely upon. A lending agency will look at the overall financial forecasts and determine if they are reasonable and flexible enough to accommodate changes such as a downturn in the local economy.
Total pre-existing business debt will be examined (credit report and net worth statement or balance sheet). The business owner's personal income and net worth may also be considered (almost certainly if a sole proprietorship) in case the business experiences cash flow difficulties.
Character -- Everyone has heard the expression, "his word is his bond." That is usually taken to mean the person is trustworthy, and reliable. It is part of someone's overall make-up, or character. It is important for the lender to know that their money is going to be taken care of by a person with a strong and true nature. This is a somewhat fuzzy thing to define, but it can be very important in how the lender perceives your business idea. Sometimes a great business idea simply does not seem to be able to be carried out by someone with the wrong attributes.
Capital -- The amount of cash you can put into your own business idea is referred to as capital. Another word for this is cash equity. Many banks require 30 per cent or more in cash equity for a business loan. The Deh Cho Business Development Centre asks for five to 10 per cent. It is important for a lender to see that the business owner has put something of theirs at risk.
Conditions -- It is always important to put the business idea into proper context. An idea that might work in Yellowknife may not work in Fort Simpson or Nahanni Butte. The economy and market in which the business will operate must always be considered. Trends and government legislation, along with a host of other factors, can impact a business either positively or negatively.
Collateral -- Assets such as equipment, land, buildings or cash can be considered collateral. These forms of collateral are considered to be better than softer forms of collateral. Collateral items such as a Direction of Payment (specific assignment of contract proceeds) and a floating charge on inventory (general assignment of inventory) are weaker forms of collateral, simply because they may be harder to convert to cash in the event of client default and business liquidation.
Appropriate collateral
No lender will consider a larger loan without taking appropriate collateral. Operating funds (when the business simply needs the money for wages or other non-asset charges) can sometimes present a challenge if no collateral is offered or available. In any event, collateral is often the last item to be considered in a loan application. After all, the idea that requires loan financing must first be viable. The business owner must be able to successfully implement his business plan, and must show that he has the capital and drive to succeed under current economic conditions. When the lender is satisfied on these items, collateral is considered.
It is important to note that the weight given to each of the five C's may be different from one lender to another and may be considered differently from one loan application to another. A lender such as the Deh Cho Business Development Centre, for example, often gives character extra weight when other factors, such as a pre-existing credit history, are non-existent.
A sixth C which I sometimes add is commitment. This is somewhat similar to character and partially demonstrated by capital, but it is important enough to consider on its own.
Attribute their success
Businesses that do succeed can often attribute their success to an owner who would not quit. True entrepreneurs are willing to adapt, change and persevere in order to succeed. This is important because many business ideas meet with initial resistance or must be amended to meet new conditions.
The Deh Cho Business Development Centre is a not for profit organization dedicated to serving business in the Deh Cho and can offer Deh Cho businesses loans of up to $75,000 over a five-year term. Contact the BDC at 695-2441 or toll free at 1-800-695-2441.
- Sean Whelly is a Business Development Officer for the Deh Cho Business Development Centre.
