Let’s examine the next of the 5 C’s of credit – Capital.
CAPITAL (NET WORTH) refers to how much do the owners have invested in the company.
How much have the owners invested in the company?
A bank may also be interested in how much capital has been invested by the owner, which requires calculated risk.
Financial statements and personal credit reports or statements assist bankers in knowing how much an owner’s personal resources can support the business as it is growing.
For companies that have yet to make a profit, elements such as an excellent customer list and payment history also come in to play. Bottom line: the business should be perceived by a bank as solid.
Debt to Equity Ratio also known as Liabilities compared to Equity
Banks essentially are looking for sufficient equity in the company on the part of an owner.
Sufficient equity can aide a business when times are soft.
It’s important a company be able to sustain itself during tough times.
Additionally, banks want assurance that an owner is truly invested in the company and will do what it takes to turn things around if cash flow becomes a problem.
When examining capital, banks typically analyze the company’s total liabilities compared to equity, or the Debt to Equity Ratio. Most banks like to see the Debt to Equity Ratio no higher than 2 to 3 times.