Dear M & M: I am going to my bank to try to get a loan for my business. What are some things I should expect and is there anything I can do before I go to increase my chances to get money? — Max
Dear Max: There are many things to consider, but keep in mind it is all about lowering the risk to the lending institution. The just want to be paid back. Two important things to consider, what are you going to spend the money on, and how are you going to pay them back?
A lot more goes into this besides those two things here are some of them. The bank is going to look at the three “C”s. Here are three “C”s to keep in mind (Character, Capacity, and Collateral).
The first “C” is your Character. This is your past performance. What is your track record in paying on time? Know what your credit score is. A credit score above 700 is the benchmark many lenders use to gauge your creditworthiness. Anything above 700 lowers the bank’s risk, as it shows you have a past history of paying your obligations on time, thus lowering the bank’s risk of default. It shows you are likely to pay your obligations.
The second “C” to consider is Capacity. What is the ability of your business to pay back the loan? Once again the more viable or profitable your business is the lower the risk, and the probability of your business to pay back the loan increases proportionally. How much more profitable will your business be if you get this loan? The purpose cannot be to just take on more debt.
The last “C” is Collateral (this is the lender’s plan B). If for some reason you can’t make the payments on the loan the bank has an asset that they can take to settle the debt or to get the money back. The more liquid the assets you can put up as collateral and the larger the value of your collateral, the lower the banks risk in case of default. It is not uncommon for a bank in today’s environment to want a 20-30% cash commitment from the borrower.
Remember the bank is not in the business of selling your house, car or inventory. In addition to the 3 “C”s it is important to have a plan well laid out, showing the use of the funds, and how you plan to pay back the loan request. Keep in mind anything you can do to lower the bank’s risk increases the likelihood of having your loan request for additional funds being accepted. Another “C” one should think about is Cash. How much more will this loan generate?