Every business will need extra funding in order to cover the expenses incurred. This extra funding can be taken from banks, investors or by selling the company’s shares. A business loan
is a loan type where the lender lends the money on behalf of the collateral placed by the borrower. This loan amount can be used for various business purposes like, paying off salaries to the employees, purchasing new equipment, repairing old equipment, etc.
Lenders before lending the amount, they look at few criterions for you to get qualified for the loan amount. Every lender will look at the 5Cs and check your business creditworthiness. If the lender is satisfied with all the criterions, then getting the loan amount is quite easy.
Let us look at the 5Cs for a clearer picture
It refers to the capacity of the business to repay the loan amount. The lender will check on how you will repay the loan amount, your cash inflows, revenues and expenses, your past credit history. If you have greater revenues and large cash inflows, then the lender will consider giving the loan. Your past credit history also plays a major role, where the business firm should have a good credit score and no default payment history, only then the lender will approve the loan looking at your business capacity.
As we all know, a business loan is a secured type of loan, where the collateral is required to put with the lender in order to get the loan amount worth the value of the asset. Collateral has a direct relationship with the capacity of the borrower. Only if you have the capacity of putting collateral with the lender, then only you get your loan approved. This collateral type can be anything from inventory, income, property to a signature by a guarantor. If in case, you have defaulted the payment, then the lender has all the rights to seize the property and sell it.
It is the type of business that it is into, that will show the character of the business. The credit history of the business will also reveal the character. If it has a good credit score, then getting a loan for the business is easy. If you have a default payment history, then chances of getting a loan are less. Based on these scores, profits and losses and type of business it is into, the lender will sanction the loan.
Every lender will check on the capital of the business so that to understand the circumstances in case the business is unable to pay off the loan amount. If the business is worth more than the capacity, then the loan amount is in a safer entity.
It is the external credit that you have less control. It is about the overall economic and external environmental conditions that affect the business's ability to pay back the loan amount. During a recessionary condition or period of tight credit in the economy, the banks will find difficulty in finding funds to loan and due to the recession, the business owners will find it hard to repay back the amount.
So, now that you have an understanding of all the 5Cs and how they impact the approval or rejection of your business loan. Every business will definitely need extra funding to carry forward it. Being aware of these 5Cs will help you to be prepared with the situations and get financial boosting easily.