The newsLINK Group - Get Credit By Thinking Like a Banker

Editorial Library Category: General Business Topics: Credit Title: Get Credit by Thinking Like a Banker Author: newsLINK Staff Synopsis: As a business owner, you know how critical it is to be able to get the money you need when you need it. To do that, all you have to do is think like a banker, and then prepare your case accordingly. Editorial: Get Credit by Thinking Like a Banker 4064 South Highland Drive, Millcreek, Utah 84124 │ │ (v) 801.676.9722 │ (tf) 855.747.4003 │ (f) 801.742.5803 Editorial Library | © The newsLINK Group LLC 1 As a business owner, you know how critical it is to be able to get the money you need when you need it. To do that, all you have to do is think like a banker, and then prepare your case accordingly. The first thing to understand is that banks want to loan you money (it is, after all, their business to do exactly that), but they also want to understand your business and do their best to make sure you will repay whatever it is they loan you. For bankers, the whole thing comes down to doing their homework before they agree to make you a loan. And that is where the five C’s of credit come in. The five C’s are: Capacity Capital Collateral Conditions Character No one can know for sure that you are a good credit risk until they have some experience with you. But the five C’s of credit can at least make it a little easier to minimize the risk from a banker’s perspective. Keep in mind that bankers understand the idea that real people, and real businesses, sometimes have challenging circumstances. (It’s the old joke about the only people who can get a loan being the same people who don’t need one.) But if you understand credit analysis, then you will be able to look at your own situation with a more realistic understanding, and you might be able to make some adjustments that will increase the strength of your case. Capacity Capacity tells a banker whether you can afford the loan you have applied for. As a result, it is possibly the most important of the five C’s. It consists of the following: Cash flow: This is the amount of money you can afford to spend on your business each month. The concept is relatively simple, although it does require some accounting. How much money does your business make during a specific period of time? What are your business expenses over the same period of time? The answer to those two questions tells you your cash flow. If you generate $15,000 in one month and your expenses total $12,000, then your cash flow is $15,000 minus $12,000, or $3,000. A banker will want to know that you have enough cash flow to be able to make your loan payments. Payment history: What kind of history do you have when it comes to paying money back in a timely way? It used to be difficult for a bank to find out whether a business had a good payment history. Today, however, some companies have made it their business to provide exactly that kind of information. One example is Dun & Bradstreet. Other payment options: If your business suddenly lost its ability to generate revenue, do you have any other assets that could be used to pay off a loan? For example, you might have checking and savings accounts, personal assets that could be sold, or other resources. Capital The colloquial term is “skin in the game,” and bankers want you to have some before they will lend you money. Nobody is going to care more about your money than you do. As a result, bankers want to know that you are taking on at least some of the risk yourself before you ask them to take on any risk. In general, lenders like a company to have at least 25 percent of the money set aside by the owner before they are willing to get into any serious discussions about loans. Collateral Assets come in two forms, liquid and illiquid. A liquid asset is something you can go out and spend immediately. Cash is the main example of this. Something that is illiquid would have to be converted into cash, and the longer it would take a banker to sell an item, the less liquid it is. Collateral is really an extension of the “other payment options” listed above in the section about capacity. When bankers look at your capacity, they check whether you have anything of value. When they ask you to use one or more of