Small Business Loans – A Banker's Perspective on What Makes You Creditworthy/feed//feed//feed//feed//feed/
If you want help for your small business from your banker, you have to learn to think like your banker. And there's a good chance that your banker is using principles I have taught, for banks and banking associations across the country, to evaluate your financial health and creditworthiness.
When I teach commercial loan officers how to evaluate a potential borrower's business and financial information, I tell them to look at the data from multiple angles, each angle neatly summed up by a "C" word. My goal is to give bankers some easy to remember categories of questions to ensure that the banker does not overlook critical information. The "C's" provide an organizing structure that helps bankers bring together financial and non-financial information for a complete picture of your business's financial health, and prospects for the future.
Look At Your Own "C's"
It only makes sense, then, to prepare for credit discussions with your banker by looking at your own information from these same angles. If you understand the first questions that pop into the bankers' minds as they review your information, how they put it together to build an assessment of your creditworthiness, you can avoid a lot of ugly surprises. You will have better answers for the questions you will be asked, you will know where you need to explain a result or trend, and you'll be able to present the story of your business in the best possible light.
You may hear of the 4 C's, the 5 C's, and so on, but I encourage bankers to examine the following " Six C's of Commercial Credit " to assess creditworthiness:
- Character : What does the banker believe about your intentions, your commitment, your tenders and habits, when it comes to executing your plans and meeting your obligations?
- Capacity : Does the banker see a company with the resources to respond to changing conditions or disruptions?
- Conditions : What are the external conditions that will have an impact on the company's health and success? And is your management aware of those conditions, and actively preparing responses?
- Capital : What financial resources do you have to handle a downturn? How will you weather an economic storm?
- Collateral : What alternative sources of repayment would be available, if you were unable to repay the loan as agreed? Do these other reimbursement resources really present sufficient value to make the bank whole?
- Cash Flow *: Is the company generating enough cash to support its operations internationally? What steps are being taken to explicitly generate cash flow?
* ("Cash flow" could be considered part of "Capacity," but I believe it is so important to the credit decision that it describes special attention as its own topic.)
Business owners who have thoroughly considered each of these elements of creditworthiness, and who are prepared to talk confidently about them , are going to get farther, faster, with their creditors than borrowers who "wing it" on these important issues. Take the time to critically, objectively evaluate your own business across these six C's before you engage your banker in that financing discussion. The more you can think like your banker, the more you will stand out from your competition for the credit available, and the easier you will make it for your banker to say, "Yes!"
Source by Jeff Judy