06/ 28/ 2005
by Steve Strauss
Q: I began my business using credit cards and never needed a bank loan until recently. I know it is not like getting a home loan, but what are the differences actually, and what should I know before I apply?
A: While it is true that a loan is a loan, you are correct that lenders do have different criteria for business loans versus residential home loans. Therefore, in order to get approval on that business loan, it is imperative that you understand what the bank is looking for so you and your company can meet those conditions.
The first difference is that the bank may see home loans as less of a risk because the money loaned is tied to the collateral –– the real estate. Because there is some risk in every loan a bank makes but potentially more in a business loan because the business may go bust, your job is to reduce that risk to the extent possible for the bank.
You can do so if you understand the “Four Cs” of business banking. Because a banker will analyze your loan application through the filter of these “Four Cs,” it is incumbent upon you to understand them before you apply. Knowing what the bank is looking for increases your chances of getting funded.
The Four Cs are:
Capacity: What is your ability, and that of your business, to repay the loan? This is a matter of cash flow. For many bankers, your cash-flow statement is the most important financial document they consider when analyzing a loan request because it allows the bank to determine if you have the capacity to repay the loan. So the important thing is to show your banker a cash-flow picture that will allow you to repay the loan in a timely manner, principal and interest included.
Capital: How much money do you need and is that amount justified by your supporting documentation? The more money you ask for, the more bank officials will review your loan and the more scrutiny your application will get. So, keep in mind that it is easier to get smaller loans. Therefore, it might be a good idea to have an initial meeting with your banker to discuss the proper loan amount request to ensure that your request fits their requirements.
Collateral: Do you have some valuable property to use as security? For example, you might be asked to secure the loan with real estate, inventory or accounts receivable. Just remember that bankers love collateral. It makes their job easier and allows them to approve more loan requests.
Character: Finally, banks will consider the character and integrity of the borrower. For smaller, independent banks, this “C” is vitally important, whereas larger banks may consider credit scoring to be more important.
Here is an example how all four of these Cs work together to get you funded: Consider the case of a friend of mine who owns a small business and wanted a loan to expand his business a few years ago. He did his research, understood the four Cs of credit and got everything in order before he applied. He already had a great reputation in the community and had the capacity to repay a reasonable loan. He then got his capital request in order, concluding that $50,000 was more “doable” than the $100,000 he had originally planned to request.
His problem was that he did not have enough collateral to secure the loan. So before he applied, he spoke with his brother-in-law who was willing to help secure the loan with his share of a family home. My pal then applied for the loan, the bank agreed, the loan was funded, his business grew, the loan was repaid and the collateral released. Everybody was happy.
If you need capital, it would be smart to think like a banker and understand these four Cs before you apply.
