Whether it's a lender trying to sound optimistic about the outcome of a loan, or a prospective borrower making a case for why his loan should be granted, we've heard a common refrain over the years:
“Don’t worry, there’s lots of collateral.”
Unfortunately, these are frequently famous last words.
Whether you're buying a house, car or a suitcase, there's one factor you're sure to take into account: capacity. When it comes to qualifying for a loan, bankers are no different. Capacity (or cash flow) is the second of the Five C's of Lending (learn about the first C here) and it is something a lender will review and analyze to determine if a business or individual has the ability to repay the loan in a reasonable and timely manner. In other words, they ask how much debt could your business could “hold” and still generate sufficient profit and cash flow to operate comfortably.
Back in 2011, our CEO, Ed Lette, wrote about the Five C’s of Lending. Given how important these factors are in the lending process, I thought it would be helpful to look at each one of these areas a little more closely.
Though most businesses have a legitimate need for a line of credit, successful deployment of the line into a business requires familiarity with the business’s cash conversion cycle (CCC) and how it relates to the growth path the business is on. They also need to be well-versed in other influences, such as changes in collections or supplier terms. Failure to assess the CCC or manage its drivers can result in unmet expectations from within and outside the business.
Topics: Content Type
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Your business is growing, but to get to the next level, it's time to seriously consider applying for a commercial loan. With all the financing choices available, sometimes it's difficult to understand the difference between the various types of loans and what your banker is trying to communicate.
Topics: Bank Customer Tips
Previously, we have talked about some of the things you need to be aware of and pay attention to when you are considering borrowing money for your business. The previous C’s of lending - Character, Capacity, Collateral, and Capital - are all important to a bank when they’re evaluating a loan. The final “C”, Conditions, is no less so. Conditions can come in many different forms and can affect different businesses in different ways.
Topics: Accounting & Finance
Many refer to capital as equity in a business. Some look at it as the net worth of a business entity. From an accounting standpoint, however, capital is simply equal to assets minus liabilities. It is what would be left over if a company converted all of its assets to cash and then paid off all of its debts and other liabilities.
As a small business owner, there never seems to be enough time to take care of everything. Most of your efforts are focused on growing your business, keeping expenses down, and increasing profitability. All this while still providing the service and results that keep your customers happy and loyal.