Small Business Loans 3 Cs
If you're a small business owner applying
for a loan or other credit, it pays to understand what lenders are looking
for. From the point of view of the small entrepreneur the decisions
that banks and other credit institutions make can often seem random. In
fact, they are anything but.
It s crucial to understand that lenders
are not necessarily risk-averse. Providing credit has a built-in element
of risk. By offering you credit they are, in effect, making a bet on the
success of your business. Like all professional gamblers, lenders
like to get as much information about their bets as they can, in order
to manage and limit risk.
So when they assess your business s suitability
for a loan, they will look at the so-called three C s : credit history,
collateral and character.
Credit History
Everyone is familiar with the idea of having
their credit history examined when they apply for a loan. Every adult has
a credit history and a credit rating based on that history. This information
is shared among major lenders.
Clearly companies, like people, also have
credit histories. The ratings based on these are sometimes called institutional
credit ratings. When you request business credit the prospective lender
will check your company s institutional rating. There are also circumstances
in which lenders may wish to check the personal credit ratings of the business
owner and directors - this is common for small businesses, startups, and
businesses that have recently changed hands.
Collateral
Remember that lenders are gamblers - but
they like to hedge their bets as much as possible. One way they will do
this is by seeking collateral on any credit they extend to your company.
In the same way that it s easier to get personal credit if you are a homeowner,
you ll find it easier to get business credit if your company has assets
that can be realized for cash in the event of your defaulting on repayment.
As with personal loans, collateral on business credit most often takes
the form of the company s real estate - lenders prefer collateral that
appreciates in value, such as land or buildings - to depreciating collateral
like company cars, or to potentially unstable collateral like investment
portfolios.
It s worth remembering that personal property
can be used as collateral for business credit. This often happens when
businesses are starting up; the directors may raise money against their
own property to finance the launch. Raising business credit against personal
property is a standard mode of operation for many sole proprietors.
Character
Of the three C s, character is the hardest
to define. It is, however, a very important concept for business borrowers.
When assessing private individuals for credit, lenders very rarely take
character into account - researching a person s background isn t really
worth the effort considering the relatively small size of personal loans.
It s much easier for lenders to get a sense
of a business s character. A company is a public organization and its actions
a matter of public record. Corporate character, however, is about far more
than your business s reputation or past performance. It encompasses your
brand, planning and preparations for the future. Character is also defined
by your personality and those of the people who work for you.
Of the three C s, character is the toughest
for a potential lender to assess. A bank can check out your credit rating
and the value of your collateral. But issues of character require the lender's
final decision maker to make a careful judgment about you.
What can you do to make sure this judgment
goes the right way? The key thing is to put the decision maker s mind at
rest by showing him you ve done everything possible to guarantee the success
of your venture. Have a detailed, concrete business and a development plan,
and show him that you ve researched your market - let these materials speak
for themselves. Be responsive and efficient in your dealings with the lender.
If you can satisfy all of the three C s,
you should have few problems obtaining reasonable business credit. Remember
that if a lender turns you down, there will be a good reason for the negative
decision. If that reason doesn t seem to lie with your credit rating or
the quality of your collateral, there s a character problem: the lender
doesn t trust your product, your market, or your ability.
Don t get angry if you are refused credit
for reasons of character - your personal character isn t being attacked.
Treat an initial refusal as sound business advice. The lender has taken
a long, hard look at your operation and your plans and something has been
found lacking. Talk to the lender to find out what improvements can be
made to secure the necessary credit. Make these changes and your business
will be stronger as a result.
Author: Small Business Loans - (
www.businessloans123.com )
Date: December 5, 2005
About the Author:
Business Loans 123 loan experts have been
servicing the financial needs of small businesses nationwide since 1997.
BusinessLoans123.com's website contains 100's of revealing articles on
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