Monthly Archives: June 2015
By Bill Aust, Senior Vice President of The Biltmore Bank of Arizona
(Originally published in inbusinessmag.com)
Whether you’re starting a business or growing the one you have, securing a loan may be a high priority for you, but many find the prospect of applying for a loan daunting. To help alleviate these fears and to provide guidance about what your banker will want to know from you and your loan application, I’m sharing the following article I wrote for inbusinessmag.com last year.
In the banker’s world, among the most important considerations reviewed when determining whether or not to approve a loan are the “Five Cs of Credit.”
The best predictor of a business’s likelihood of repaying a loan as planned is a proven history of positive cash flows. This cash flow history needs to be adequate to make loan payments on the new loan request, plus a little more. Banks typically desire a debt service coverage ratio (ratio of cash available for debt servicing to interest, principal and lease payments) of at least 1.25 times the debt service.
In the event that future cash flow is not sufficient to make scheduled loan payments, banks normally want some other business asset or assets to serve as a back-up repayment source to satisfy loan payment obligations. Collateral can take many forms, but often will include accounts receivable, inventory, real estate and equipment as well as other tangible assets.
Although a business starts with a vision in a person’s mind, businesses rarely make it to the next stage without sufficient capital to help make this vision a reality. Capital is defined as the amount of dollars invested combined with prior earnings retained by a business. The most common reason loans are turned down by banks is that a business does not have sufficient capital to support either existing or future business operations.
Many internal as well as external conditions have an impact on a business. Although a business owner may have little or no control over these conditions, it is critical that the business owner be aware of them. Internal conditions include staffing, management, operational issues and more, while external conditions may include governmental regulations, business climate and competition.
A good reputation as a business and as a person is one of a businessperson’s most important assets. For banks, a key indicator is how the person handled previous business and personal extensions of credit. Bankers care about how business is conducted and how individuals conduct themselves.
With this Five Cs knowledge in your back pocket, I hope the loan application process will seem less of a mystery and more of an opportunity. And remember, it’s a great idea to establish a relationship with your banker before you apply for a loan. The right banker should be able to help you understand whether a bank loan is the right solution for you and your business and to identify the information to include on your loan application.
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