Small Business Credit Analyst – The 5 Cs of Credit are the five criteria that many commercial lenders use to find out about potential borrowers. 5C helps them decide whether or not to give you a business loan.
Understanding what the five factors are and how lenders will assess you on each is vitally important when applying for a business loan and can make all the difference in getting approved for a loan. get a loan.
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The 5 Cs are a combination of both qualitative and quantitative measures, and once you understand them, you can often improve your score.
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That’s why we’ve hired some of our senior business advisors to help explain what the 5 C’s of credit are, how to decide where you’ll get your credit rating, and give you some tips. Practical on how to improve your rating on each to help you get approved for a loan.
Lenders will typically consider your personal and business credit when determining your personality, but your personal FICO score is often the main factor they look at.
This number is extremely important because lenders see it as a reflection of how creditable you are when it comes to repayment.
Lenders often also want to see that your debt utilization ratio—calculated by dividing your credit card balance by your credit limit—is 30 percent or less.
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Let’s say you have $10,000 of available credit and you’ve used up $9,000, which is a 90 percent utilization rate. If this is the case, work with a business advisor at your local SCORE or SBDC to review your situation for recommendations on the best ways to reduce your balance by 30% or less. .
Different lenders often have different expectations about your credit score, and different loan products often require different minimum credit scores. It’s important to talk to your lender and ask them about their specific needs.
For example, mission lenders like CDC Small Business Finance can offer loans to people with scores as low as 680 (as of August 25, 2020, check with a loan officer for details). know current eligibility requirements).
Pay attention to personality as lenders will not only analyze your credit report but also trends, payment history and whether you have returned money to the bank in the past.
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The second of the 5 Cs is capacity, which is a measure of your ability to repay the lender.
Typically, lenders determine affordability by analyzing both your personal and business income and comparing them to your expenses to see if you can afford to pay them regularly. Are not.
Like I said, money is king. If you want to take out a loan, you need to show that you can earn enough profit to repay the loan. There are two main ways to prove this.
Marcel Watts, CDC senior business adviser, says for existing businesses, it’s important that they pay taxes for the previous two years and have interim financial statements to show income.
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Additionally, you’ll want to provide a record of previous business performance and proof that you can support your normal household debt obligations along with a business loan you may be able to get.
Startups will need a complete business plan and realistic financial projections “to give us a deeper understanding of the business and how likely it is that they will pay us back,” said Eddie Landeros, also on the team. business consultant at CDC, said.
Not sure where to start with a business plan? Here is a link to business plan templates to help you. You can also reach out to many free resources to help you develop your plan. Here’s a list of nonprofits that offer services to help you get started.
The third of the 5 Cs is capital, i.e. how much of your own capital will you invest in your business.
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Bringing some of your money to the table is very important. It demonstrates that you are investing in your business and seeing it succeed. Lenders want to see that you have a slight edge in the game.
Most lenders rate capital based on your down payment. Banks tend to look for a 30% down payment. A nonprofit lender like CDC Small Business Finance is more flexible and requires 10% upfront for small business loans and 20% for startups with industry experience.
The fourth of the 5 Cs of credit is collateral, which is something you agree to let the lender take if you default on your loan.
Typically, traditional banks ask you to mortgage your home or other real estate property that you have as an investment property.
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This process is important to them because if someone is unable to pay them back, they can always seize the property and get their money back.
Alternative lenders like CDC Small Business Finance think beyond that by accepting not only real estate as collateral, but also vehicles, boats, yachts, and planes (sometimes if they’re small).
The last of the 5Cs is conditional, which is a market analysis of trends in your industry at the time you’re trying to get a small business loan.
For example, if we are in a recession and there is not much work for construction companies, some banks will be less able to lend to construction companies.
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Banks often have this policy when there is a problem in an industry. For example, if you’re a gym owner trying to get a loan in California during the state’s mandatory closure of all gyms due to COVID-19, it may be difficult to get a loan from a bank. traditional goods.
Fortunately, alternative lenders like CDC Small Business Finance that operate on a mission have more flexibility and consider both your conditions and your entire history when deciding to approve a business loan. small.
All 5 Cs are important, but most lenders consider personality the most important. Many banks have strict requirements on whether they will grant certain loans based on credit scores.
If you need help fixing your credit score, check out our article on how to fix your credit score yourself to increase your chances of getting a small business loan.
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At CDC Small Business Finance, we work alongside borrowers and support them beyond getting financing.
Our team will walk you through the loan process and help you with everything from understanding debt payment rates to the documents you need for a small business loan and how to speed up the process.
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