The 5 C’s of Obtaining a Small Business Loan
Author: Katya Noreika, Entrepreneur Works Loan Officer
Ever wonder what a small business lender is looking for in your loan application?
While Entrepreneur Works Fund tends to be more flexible than traditional lenders, our lending staff looks at a lot of the same information. For example, Entrepreneur Works Fund doesn’t have a minimum credit score cutoff or need real estate as collateral, but credit history and collateral are still important considerations of a loan application.
When filling out your loan application, here are a couple of considerations to increase the likelihood of getting a loan approved. Lenders call these items the 5 C’s:
With capacity, lenders want to know how a loan will be repaid. If you’ve been in business for a while, a lender will want to see your monthly or yearly sales and expenses. The lender is looking for whether the business’s profits can cover the monthly loan payment, even in your slow months. If not, do you have another job or source of income (maybe from a family member) that can cover the loan payments?
A lender wants to know how much money you have put into the business. In other words, how much skin do you have in the game? The investment amount that a lender looks for can vary, but aiming for 10-25% is a good start. This means that if you are requesting a $10,000 loan, you should try to invest at least $1,000 of your own savings into your business.
Do you know how to run this type of business? Have you paid back other debts? With character, a lender looks at your management and industry experience, as well as at your credit report. You can pull your credit for free online, and you should do this before applying for a loan. Negotiate payment plans or settlements if you have collections accounts to demonstrate your commitment to repaying your debts.
Collateral protects a lender if a business cannot repay a loan. Collateral can be real estate, equipment, vehicles (personal or work), accounts receivable, inventory, and securities. Minimum collateral requirements vary across lenders, but offering collateral can increase the likelihood of getting approved for a loan. If you don’t own a home or car, consider finding a family member or a business partner to co-sign on the loan with you. This guarantor, as lenders call them, agrees to repay the loan if you and the business cannot make your monthly loan payments.
Is the loan you’re requesting a reasonable amount for your business? Will the loan increase your profits? With conditions, lenders want to know why you need the loan and how it will help your business grow. Lenders will also do an environmental scan of your business. Do you face a lot of competition for your product or service? Will enough customers walk by your store? Do customers really want to buy your product or service? You can strengthen your loan application by answering these questions in a business plan. Free business plan templates are available online, and you can also create one by participating in our Start It. Grow It. business skills course. Sign up for our newsletter to get notified of upcoming class dates.
Interested in a loan? Have a question about what you’ll need to apply? Give our Loan Department a call at 215 545 3100 ext. 227; we’re happy to help!