I’m sure most who are reading this article have heard of the “4 Cs” of something at one time or another.
I wanted to write this blog entry to directly address the Cs that matter when it comes to getting a business loan.
1. The Role of Credit
The first “C” I will address is credit, I’ve wrote several entries on business and consumer credit and their importance in getting a business loan.
Credit is extremely important to a new business’s ability to get funds and for those businesses who don’t cash flow as well.
Remember everything is about positive and negative compensating factors.
How do you offset the fact that your debt service (or debt ratio) is on the low side for an approval?
Make sure that your commercial and personal credit are solid and the underwriter who is reviewing your deal is more likely to take a chance and approve it.
I recently received an approval and funded a working capital loan for a real estate business even though the client had defaulted on a rather large business real estate loan back in 2008.
The default was due to the declining market conditions at that time.
I was able to push him through the process only because this client reestablished his personal credit and built a strong commercial credit profile.
Because of the industry he was in and the perception that he couldn’t get a better loan because of the previous default, he had taken several high cost short term loans, but now he is with an FDIC insured bank who can facilitate growth for the future.
It was a game changer for this business.
2. Cash Flow
The 2nd “C” we will discuss is cash flow.
I remember sitting in a room of entrepreneurs in 2014 listening to some large equity investors talk about cash flow.
I remember one of the principals from the largest firm there said, “Cash flow is more important than your mother.”
Now we know he didn’t really mean it that way, but he wasn’t far off.
At the end of the day, if I had to choose between cash flow and credit, I’ll take cash flow all day.
If you have solid cash flow, even with poor credit, you will always have options.
I can’t say the same if you only have good credit and no cash flow to go along with it.
When I talk about cash flow, I’m really focusing on how its managed, and not the amount.
The 3rd “C” we will discuss is collateral.
Collateral can be important, especially if you want larger loan amounts that are above and beyond what a business can typically borrow.
It can also be a positive compensating factor that gets your loan approved when your credit or cash flow management has had some issues.
You don’t need collateral to get a business loan, but it sure helps.
The 4th and last ‘C” we will discuss may be the most important because no matter how good your credit is or how much collateral you have, I have seen this last “C” become a reason for a decline and that can be devastating to a business owner who thinks they have a loan.
This last “C” is for character, and it holds a tremendous amount of weight with any underwriter reviewing your file.
Typically, in the business loan process, at some point the lender will want to do an interview with the prospective client.
That interview is not to have small talk, even though the people who conduct them want them to seem that way.
It’s an opportunity for the lender to catch you with your guard down if you’re not prepared.
If you are asked questions concerning your sales, business model, future plan for growth, management team, or any other business-related question and you don’t have a clear and concise answer, it’s a problem.
Think about the due diligence we do in our own lives, when we look for a baby sitter or a place to house our pets, we always want to make sure the ones taking care of them understand how important they are to us, and we want the best possible treatment while we put our precious loved ones in their hands.
Banks and lenders are no different.
When they do a due diligence call, they are trying to make sure you take care of their babies (their money) because its precious to them and if red flags start popping up throughout the conversation, they will be reluctant to lend.
Make sure you have your financials in front of you and your most recent tax return.
Be prepared to answer questions concerning your product or service, as well as the business’s short and long-term goals.
Don’t treat the call as something you just have to get done to get your money.
Treat it as an opportunity to sell your business and why it’s great at what it does.
Explain any awards the business has won or your online reviews (trust me, they have already looked) you might have.
This is your time to show them that your business is so great that the reward far outweighs the risk.