Beginning or expanding a business can be an exciting venture. But to do so successfully, a business owner is going to need capital. That comes from either the owner’s personal check book or financing extended through a bank.
To secure financing through a bank, a business owner must understand the 5 C’s of Credit. These guidelines are used by financial institutions as a way of analyzing a borrower’s request for a loan.
Let’s take some time to examine each of the 5 C’s of credit:
Cash flow – 1st form of repayment
Does the company make money? Has the company made money for the last three years?
- A business owner may feel he needs additional capital to run a business, but he must also demonstrate the ability to repay the loan being considered.
- In determining this, a bank will analyze the “EBITDA” ratio which looks at a business’ Earnings Before Interest, Taxes, Depreciation and Amortization. Broadly speaking, it’s the measure of the cash flow generated by a business. This is the cash flow available to repay the debt once the company has met its other payments required to sustain the business.
What is the loan going to be used for?
- Banks like to know if the loan proceeds are going to positively increase cash flow. Remember cash flow is the 1st form of repayment.
- A sound business plan will ensure the business understand how to use the loan proceeds to increase cash flow and grow the company.