It can be very intimidating for Maine-based small business owners to seek out a bank when they need a business loan. Bankers obviously want to minimize their risks, and usually small business owners need the loan because they are trying to do something which could be risky.
Gaining an understanding of the lending process can increase the odds of getting cash for a small business. Some of the basics are:
When considering whether or not to grant a loan, bankers will want at least two sources for repayment, and they may even want a third. One is cash flow from operations for short term loans, and ongoing positive earnings for long term loans.
A second source of repayment is collateral. This could include a mortgage on fixed assets, inventory, or accounts receivable.
A third possible repayment option is a personal guarantee if the lenders want a demonstration of the business owner’s commitment to the success of the company.
Five C’s of Credit
Another aspect of the loan application process is answers to what is referred to as the Five C’s of Credit. These are:
- Capacity. Does the business owner have the ability to meet the financial obligations of the debt? What are the track records of both the owner and the business?
- Collateral. What assets can support the primary source of repayment?
- Capital. Is there equity in the company, and has the small business owner personally devoted money to the business?
- Character. Is the small business owner and any of their partners generally trustworthy? The loan officer will need to evaluate the owner’s integrity
- Conditions. What is the general forecast for the company’s industry?
The scary process of obtaining a loan can be eased if the small business owner has their answers ready and can answer questions from the lender convincingly. For more information, talk with Filler & Associates.