Most businesses need to borrow money from time to time, whether to fund a startup operation, expand an existing business or just manage a rough patch. Your chances of getting a loan approved will be enhanced by having either a solid business plan incorporating the "five C's" of business credit or documented financial statements showing the overall health of your business. Lenders use this information to help determine whether to extend credit, so be aware of how they may affect your loan application.
Here are the areas that lenders really look at:
- Character. Lenders review your education and experience as well as personal and business credit history. They may look more favorably, for example, if you have an existing business or you've managed a similar type of business in the past and can demonstrate a successful track record. However, that doesn't mean that you can't get a loan if you're switching fields or starting a new business. In those cases, your personal credit history and the general impression you make on the lender may weigh more heavily. It may be helpful to get character references from respected community members and former employers to bolster your case.
- Capital. You'll need to put up a certain amount of money—perhaps from personal savings, an equity loan on your home or money from friends and relatives—in order to borrow money. Not only may a certain amount of capital be required by law, but lenders also want you to have some "skin in the game." They may be more willing to take a risk on your business when you're willing to risk your own money as well.
- Capacity. Lenders want to be repaid, so your capacity to repay the loan is a critical factor in determining approval. Capacity will be based largely on the past and projected cash flow of an existing business. With a new business, it's important to include a detailed explanation of how the business will be able to repay the loan by including projected expenses and income based on solid research, not just wishful thinking.
- Collateral. As a secondary safeguard to capacity, lenders may require a certain amount of collateral—basically assets that can be sold, with the proceeds going to the lender should you default on the loan. Collateral may include inventory, vehicles, cash, investments, receivables, real estate and capital equipment such as machinery. Some entrepreneurs use their personal homes as business collateral, but beware of the risk of losing your home if you're unable to pay back the business loan.
- Conditions. Finally, your business plan should detail general market conditions and your business' competitive edge. Demonstrating that you've done your homework—such as researching the competition, determining the demand for your product or service, developing a sales strategy, creating a pricing plan and assembling a team of financial, marketing and tax professionals—will go far toward convincing lenders that your plan is viable.
Turn to Navy Federal
There's one more "C" you shouldn't ignore—your credit union. Navy Federal has the products and services—including business loans and lines of credit—that our members need to pursue a successful business strategy. Visit Navy Federal to learn more or call Business Services at 1-877-418-1462.