6 Cs of Business Loan – Have you ever applied for a bank loan for your business and was turned down by the bank? Do you wish to apply for a bank loan for your business? If you were once turned down, then it must be because you failed to note and apply the 6 Cs of loan application. As disappointing as the rejection must have been to you, I am asking you to cheer up because, in this article, I will show you the 6 Cs which, when you apply them, the bank of your choice will definitely grant you a loan to grow your business.
It is important to understand that banks desire to lend because it is their primary source of income. They are, however, extremely cautious, and will only lend to companies who have demonstrated their ability to execute and repay the debts.
Bank loans are funds held by depositors that must be accounted for when depositors demand them.
Bad debts create twin holes in bank books since they are money that have yet to be recovered from borrowers and must be offset by debiting the banks’ income from other sources in order to keep their books clean at financial reporting intervals.
Six (6) Cs of Loan
We’ll try to explain how to package your business for bank loans using the 6 Cs of credit in this article.
The single most essential criteria in bank lending is character. The bank must believe that the customer is a trustworthy and reputable individual who can be relied upon to refund depositors’ funds supplied to him in the form of a loan, despite the fact that this is a highly subjective appraisal of the customer’s reputation. The following are some of the items the bank looks for: Credit history, including personal and business.
Have you ever asked the customer if they’ve ever given DUD checks? Has the customer’s account previously gone into debit without an overdraft and as a result of bank charges? Does the bank have the customer’s current address and other recent information?
Educational background, employment experience, and consumer age (Are there succession plans in place if the business’s main movers are elderly?) are other identifiers for the intended borrower’s personality.
When a bank loan is necessary, collaterals are a fallback option for the bank; they are secondary repayment choices for bank loans and are not a key component in lending. Collaterals are supposed to put borrowers on edge and make them want to make sure the loan is paid back because if they don’t, they might lose something really valuable. Banks take collateral such as real estate, machinery, accounts receivables, inventories, as well as cash deposits and other important corporate assets. The type of collateral depends on the loan and the bank’s preferences.
The overall environmental and economic factors that surround the consumer and his business are referred to as “condition.” The customer’s industry and the purpose of the bank loan are assessed. Is the client requesting a loan to expand its ability to produce bathing soaps at a time when the government has only recently approved bathing soap importation? Customers’ competitors and what they’re doing are also assessed to see if they’re up to date on industry events or if they’re going to invest in obsolete technology while their competitors are far ahead. The size of the customer’s operating industry, the customer’s market and market share, the customer’s suppliers and their strength, and other economic and political factors that could affect the customer’s operation are all taken into account.
Before approaching your bank for loan, you must have invested your funds in the firm as an intending borrower. You must have put your money into the business, learned from your mistakes, and made some money out of the process. The majority of lenders do not fund start-ups or 100% of business initiatives. The business owner is anticipated to invest roughly 30% of the venture’s cost, while the bank would cover the remaining 70%. Your capital is made up of the money you put into the business and the knowledge you must have gained through starting it from the ground up.
Another crucial part of credit rating is capacity. It demonstrates the ability of the prospective borrower to repay the loan. Apart from the borrower’s character, all lenders are more interested in the source of payback and its capacity to meet repayment deadlines than they are in collateral and other Cs. Existing and forecast cash flow, payment history of previous loan/s, how geared the borrower is, and availability of alternate sources of repayment in case the primary source fails are some of the criteria to evaluate capacity.
This C assesses the customer’s level of trust in his company. This is represented in the business plan as well as the interpersonal relationships with customers. A professionally written business plan that considers the customer’s capacity, mentions the customer’s character, explains the customer’s financial situation, and explains why now the right time to lend to him is. The plan, which also explains the collateral and details the alternative repayment source/s, as well as the level of prime mover engagement and the amount of money invested in the business, will undoubtedly communicate positively and instill confidence in the lender about the intended borrower.