So, you’re thinking about going to the bank for a loan because your business is growing and you need some extra cash to keep the momentum going. To improve the probability of being successful with your loan application, preparation is the key.
There are five key tests every bank looks at first. If you pass these, it is much more likely that you will get your loan. The banks refer to these as the five Cs.
1. What’s your CHARACTER?
You might be surprised to know that this is one of the most important considerations for any financier. After all, it’s the person behind the business who is responsible for all the loan repayments.
Banks will look at your personal integrity, reputation and willingness to repay the loan. Financial statements are used to help lenders make an objective decision.
Bankers judge character by evaluating your payment history with other current or previous loans. They also check to see that vendors are paid on time and taxes are up to date.
Lenders also want to see how business owners have handled any past crises. They will check for a history of defaults, writs, judgements or bankruptcy.
2. Do you have CAPACITY to repay?
Of course the bank wants to get repaid, so they will look at the capacity of the business to be able to repay the loan.
You will need to provide copies of a budgeted profit and loss statement and a cash flow forecast that covers the time frame of the loan.
In both statements, don’t forget to include the interest and repayments of the loan you are applying for so that it shows you will have adequate cash flow and remain profitable during the life of the loan.
3. Can you provide COLLATERAL?
Collateral is a fancy term for security, and in most cases when you apply for a loan you will need to provide adequate security.Often collateral for a small business will be your home or business premises (if you own them).
The bank is looking for a way to recover the money for the loan if you default on the loan. For example, if you are looking for a loan to open a café, it is unlikely that the bank will take your fit out and stock as security because if the business doesn’t survive, the value of these assets will be minimal — that is why you need to have adequate security to cover the loan.
4. Do you have CAPITAL invested in the business?
When applying for a loan, the bank will want to see the financial position of your business.
In particular, they will be looking at the type and liquidity of the assets of the business and the type and nature of the liabilities (the amounts owed by the business). They also prefer for you to also have capital invested in the business so both you and the bank are at risk together in the venture.
5. Can you meet the terms and CONDITIONS?
Finally, the bank will look to see if you and your business can meet all the terms and conditions of the loan to ensure that there is no default on the loan. They will review the proposed repayment schedule against your projected cash flow and your ability to meet all the conditions of the loan.
Conditions may include providing quarterly financial statements, maintaining certain financial ratios, and providing proof of insurance. The types of insurance required may also vary and could include key-man insurance in case of the business owner’s death or disability.
Remember, preparation is the key. Make sure that you and your business meet each of these tests, and you will be well on the way to a successful loan application.