Any reliable financial institution tries to alleviate the risk of losing by performing a thorough credit analysis to businesses or individuals applying for a loan. They measure this by using the five C, or characteristic, of credit -character, capacity, capital, conditions, and collateral. It is a framework commonly used by traditional lenders.
Once you have taken into consideration the loan process in the lenders perspective and be able to understand what they are looking for it would be easier for you to increase your chances of getting approved the next time you file for the credit.
Get to know more about these characteristics below before you lined up in the bank to ensure that you would get the approved mark on your business loan application.
1.Character
This refers to the lender’s opinion of you, of how trustworthy you seem to be and of course your reputation. Some people call it “credit history” because it shows how faithful you were in paying off your previous debts.
Lenders often think if they would be able to get their money back this is why it is important for you to let them know that you are someone who could pay them back on time.
There are a few ways on how to improve this area. One is maintaining a good credit score. Poor credit score could be a major deal breaker that’s why it is advisable to first raise this and maintain for a while before applying. Being professional also pays off. Always put your best foot forward. Show them you are responsible enough to pay them back on time.
- Capacity
Other people call this cash flow. It is basically your ability to pay back the loan. It is not enough to prove that you have previously paid your loans on time you must be able to prove that you also have the capacity to do so.
Lenders prove this by asking you to submit documents that could help them in assessing your financial situation and capacity. Most of them ask for your Cash Flow and/or bank statements when you apply.
To improve this you have to pay down your outstanding debts completely pay it off. Doing so will increase your cash flow available for a new loan. It would also show the lender that you have a good paying history.
- Capital
This is the amount of money you have invested in your business. For lenders, the more money that you have invested in your business, the less likely you are to default on your loans. It shows them that you take your business seriously and has a lot to lose and would not let the business go under.
In applying for a business loan, you need to highlight your investment successes. It will demonstrate that you’re experienced in business and more likely to increase cash flow.
If you happen not to have any money invested in your business, you need to heavily rely on the other 4 C’s. If you are strong enough in those areas, you may be able to offset the lack of capital.
- Collateral
These are assets that act as insurance that you will pay your loan on time. Once you default on your loan, lenders would seize it to make up for their losses.
Collaterals differ from lenders to lenders. Some require property or vehicles other accepts savings account or even equipment. This is why it is important that you must first evaluate the lender’s policy regarding this so you could be aware of what is expected from you.
So you could easily get the grant, make sure that you know what you have to offer so you could decide which collateral you are comfortable with then you could find a lender that you could come to terms with.
- Conditions
There are two conditions that lenders usually take into consideration, the condition of the loan and the economy. Factors like interest rate, principal, your business’ market could determine how likely you are to pay off your loan on time.
This is why when applying for a loan you should let your lenders know your plan. Letting them know exactly how you wish to use the money to increase your cash flow also increases their faith in your business.
The next time you might need to file a loan, remember these 5 C’s to increase your chances of getting approved.