The 4 C's of Credit for Business Loans

Character - Capacity - Collateral - Capital

4 C's of Credit for Business Loans
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What is Credit for a Business Loan? 

Banks look carefully at borrowers before they lend money, especially in tough financial times like these. 

The #1 reason is "credit," both poor credit and lack of credit. 

Although the general credit principles are the same, lenders look at business loans differently from personal loans. The lender looks primarily at the credit of the business. That's fine for an existing business, but what about a ? In this case, the lender must include the credit of the business owner. 

Because business loans are the riskiest of any type of loan, lenders are much more strict with their criteria. Don't be surprised if youris scrutinized, as well as the credit of the business. 

What bankers look for in their approval process for business loans can be summarized in the following criteria, termed the "4 C's of Credit." 

Character of Borrower

Character refers to the financial history of the borrower; that is, what kind of "financial citizen" is this person or business? Character is most often determined by looking at the credit history, particularly as it is stated in the credit score (FICO score). Factors that will affect your credit score include: The fewer the problems, the higher the credit score. A high personal credit score (over 700) may be the most important factor in getting a business loan.

  • Late payments
  • Delinquent accounts
  • Available credit
  • Total debt

Business and personal credit are two different things. Most new businesses have no so they must use the personal credit of their owners. In such situations as business loans and leases, the owner may need to give a

Capacity to Repay

Capacity refers to the ability of the business to in order to pay back the loan. Since a new business has no "track record" of profits, it is riskiest for a bank to consider. If you are , capacity is easier to determine, and a business that can show a positive (where income exceeds expenses) for a sustained period of time has a good chance of getting a business loan.

Capital Assets of Business

Capital refers to the capital assets of the business.  might include machinery and equipment for a manufacturing company, as well as product inventory, or store or restaurant fixtures. Banks consider capital, but with some hesitation, because if your business folds, they are left with assets that have  and they must find someplace to sell these assets, at liquidation value. You can see why, to a bank, cash is the best asset.

Collateral to Secure the Loan

is the cash and assets a business owner pledges to secure a loan. In addition to having good credit, a proven ability to make money, and business assets, banks will often require an owner to pledge his or her own personal assets as security for the loan.

Banks require collateral because they want the business owner to suffer if the business fails. If an owner didn't have to put up any personal assets, he or she might just walk away from the business failure and let the bank take what it can from the assets. Having collateral at risk makes the business owner more likely to work to keep the business going, as banks reason it.

Adding up the 4 C's of Credit

As you can see, when it comes to credit, the old saying that "banks only loan money to people who don't need it" is basically true. In order to get a business loan, you will need to:​

  • Have an excellent , both personal and business
  • Prove your business will generate revenues to pay the bank loan
  • Show that the have value in case they need to be sold to pay off the bank
  • Pledge your own assets in case the business fails or get a who has assets to pledge. 

In some cases, it might be easier just to take your own money and go start your business.