Majority of business owners are already familiar with the 5 C’s of credit, but what I have experienced is
- Some don’t understand it,
- Some ignore it until it’s too late,
- Some don’t properly prepare for it.
I work with all types of business owners in all kinds of industries, and every business owner interprets financial success in their own terms. In terms of access to credit/capital, this topic is important to a lot of business owners wither they need it now OR in the future. What I always tell my clients is plan for the future because you never know when that bank loan or line of credit will bring you closer to financial success. I can share all kinds of scenarios, but ill focus on the top bad & good example I see often:
- Scenario 1 (bad): I have had clients approach me because they have secured a large contract that they have either started or about to start, but they do not have sufficient capital for the project, so they want to review their options with the bank. I have been able to help some in this scenario, but a good majority had no luck because they didn’t prepare for it ahead of time.
– I call it: Growing too big to fast, without proper planning.
- Scenario 2 (good): I have had clients that met with me and we discussed obtaining credit from a bank, and I conducted a needs assessment, then I tailored a specific plan to meet their needs. The plan was to prepare for the future, and depending on each client’s situations, different options were presented. Within a few months to a year later, I have had some of those same clients come back to me because, as expected, the time for more capital was needed, and because we prepared for it in advance, the client had better success for obtaining that business loan or line of credit.
– I call it: Planning for successful growth.
The Main objective here is to understand what is needed for obtaining credit, then reviewing your current situation, and then planning for the future based on where you currently stand.
There are 5 C’s of Business Credit:
1: Credit History (Character) : Lenders will review your personal credit history, and business if available. Your credit history includes FICO Score, payment history, how many loans or lines of credit or credit cards you have, balances owed, revolving credit available, inquiries by other companies, etc. If your credit history includes any derogatory credit such as late payments, unpaid accounts, judgments, bankruptcy, foreclosure, or short-sales, which generally report for about 7 years, then you may have some challenges obtaining credit.
– My Recommendation: Review your Credit Report ATLEAST Annually (I review mine quarterly) and make sure everything is up to date & accurate.
– Also, having a Dun & Bradstreet score can play a very important role in financing. I have heard that you can obtain a DUNS # for free. If you have one, make sure your vendors report your payment history to them. http://www.dnb.com/
2: Capacity (Ability to Repay): Wither your business is starting up, growing, expanding, or you just need some money to help with your Net 30/60/90 day accounts receivables or just need help with payroll, lenders want to know what is the source of repayment. The more sources of payment you have, the stronger your financial situation looks. The things you want to be aware about is does your business have good cash flow, does your balance sheet look healthy, and can you afford the loan/line you are requesting? As a secondary source of repayment, are you able to put up some collateral or do you have any additional source of income that can be used for the repayment? A lender will also compare your cashflow to your debt-to-income ratio. In other words, after all your current bills are paid for, how much money is left to pay this additional loan or line of credit.
– Review this carefully! I see a lot of clients have challenges in this area because either they are maxing their credit cards OR they don’t report all their income on paper (aka Taxes) OR they don’t maintain good cashflow in their bank accounts, which all makes it difficult to obtain credit.
– According to Experian, you want to keep your “Revolving Credit” accounts UNDER 30%. http://www.experian.com/blogs/news/2012/09/24/rebuild-your-credit/
3: Collateral: When a financial institution give out credit, it wants to make sure it gets its money back, so the question is what type of collateral will be available? Will you be financing a Commercial building, a Truck, heavy equipment, or do you own some type of business or personal collateral that is eligible to be used. The SBA provides a chart of what collateral can be used.
– Eligible Collateral according to SBA: http://www.sba.gov/content/borrowing-money
4: Capital: This represents other sources of repayment to the lender such as Savings, investments, and other assets to repay the loan. Also, it is important to understand that there is no such thing as 100% financing, so financial institutions would like to know that you have some skin in the game by putting some of your own money into the purpose for the loan or line of credit.
– In my recent studies, I have learned that the best way for building savings is by always saving ALTEAST 10%+ of your income off the top. My recommendation is to save 10% of your business net income, and 10%+ of your personal income. If you do this consistently, based on my experience & other psychological studies, you will learn to adjust your lifestyle around that remaining 90%. By doing this, you build for the future.
5: Conditions: Lenders will consider what the purpose of the loan or line of credit will be used for. Other factors that may be considered is the industry type and economic or environmental conditions affecting the business.
I hope this post gave you some insight on brining you one step closer to financial success! Please comment, share, & like this is post if it has helped you in any way. More importantly, please contact me if there is anything I can do to be a part of what makes you successful.
SCROLL BELOW because I have shared some VERY IMPORTANT, CREDIBLE SOURCES, & HELPFUL LINKS that can help you expand your knowledge on this topic.
Wishing you continued success,
Business Banker, Business Coach & Consultant
VERY IMPORTANT, CREDIBLE, & HELPFUL LINKS :
Building a Banking Relationship: http://www.sba.gov/community/blogs/guest-blogs/industry-word/5-ways-establish-favorable-bank-rating-your-small-business
GREAT RESOURCE! (Save to your Favorites): http://www.handsonbanking.org/biz/
Solution to Build Business Credit: http://www.businesswire.com/news/home/20130508005589/en/Wells-Fargo-Adds-Bankers-Launches-Secured-Credit
5 Ways to Rebuild Your Credit Score: http://www.experian.com/blogs/news/2012/09/24/rebuild-your-credit/
More on Revolving Utilization: http://finance.yahoo.com/news/credit-101-revolving-utilization-060108050.html
Borrowing Money for Your Business by SBA: http://www.sba.gov/content/borrowing-money
- Wells Fargo to Be Recognized as U.S. Small Business Administration’s 2013 Large 7(a) Lender of the Year: http://www.businesswire.com/news/home/20130620005693/en/Wells-Fargo-Recognized-U.S.-Small-Business-Administration%E2%80%99s
- Basics of Small Business Funding (newbusinessplanners.wordpress.com)
- 5 Ways to Fund Your Business Idea (shantrellwhite.wordpress.com)
- Small Business Loans are Magic for Your Business (loansservices.wordpress.com)
- Useful Tips To Secure Guaranteed SBA Loan (businessworkingcapital.wordpress.com)
- Dun and Bradstreet Rating: Three Ways to Generate a Paydex Score (businesscreditblogger.com)
- Can a Business get a Loan? (suggsgroupinc.wordpress.com)
- 10 ways to improve your business credit rating (cimaaccountant.com)