5 C’s Entrepreneur must be aware of before taking a loan

No financial institution or banks will give loans to someone they don't have faith in. It is necessary that entrepreneur must be fully prepared for the worst case scenario and ready to face any condition that occurs while presenting their business for a loan. From lenders' point of view, they give preference majorly to these five C’s, in order to analyse the credit worthiness of entrepreneur before proceeding further to the loan transaction.

Some basic terms that entrepreneur must keep in mind before applying for the small business loan are these Five C’s:

Character

For banks and NBFC’s, the character of a person is enough to know whether he is capable of repaying loans, does he possesses the ability to conquer his visions and will it be profitable to give loans to this business or not. In character, lenders may look for entrepreneur’s reputation and goodwill, confidence while approaching to them, history and experience in business, clarity of idea for the business and proper business plan. Maintain a good character and relations in the market.   

Credit Score

A numeric summary of your credit history that depicts person’s credit worthiness is Credit score or Cibil score. These are measured by banks and now- banking financial institutions in order to know entrepreneur ability to repay loans. Credit or Cibil score is measured under 300-900, the highest the credit score the better it is for business. A good credit score for a business that attracts the lenders is around 750-900. If you have a credit score below this average then banks may feel it’s a risk to lend money to this business. So it is essential to maintain a good credit score.

In case if you are facing the problem of low credit score then follow these steps:

• Reduce the number of loans you borrow in a year
• Maintain a balance between secured and unsecured loans.
• Reducing the number of loans you borrow in a particular year.
• Ensuring your debt income ratio is low.

It is necessary to maintain a good credit score to get small business loan easily.

Capital

While evaluating entrepreneur’s profile, lenders will definitely check whether you have some bootstrapping in business or not. Lenders issue loan for about 80-90% of the capital required. A lender never takes the whole responsibility for capital on their shoulders, and owners have to show that they have made some financial commitment in past. Having some money for day to day operations and generating operating profits will indicate as a positive sign for a lender to give you a business loan. The entrepreneur should bootstrap his business and when business in good condition, and then approach for a lender.

Capacity

One of the basic question that lender asks an entrepreneur is ‘How are you planning to repay the amount?’ for which he must be prepared. The entrepreneur has to show his expenses and revenues statements and indicates cash flow statement with a timing of outflow of cash to a lender. Lenders prefer those businesses which are generating revenue and can handle themselves even in difficult situations. An entrepreneur must prepare a proper business plan.

Collateral

Collateral refers to as the security or assets that businesses can provide in order to attract funds from lenders. Collateral gives a lender a confidence to lend money to business as the lender can always gain some amount back from the security provided by the entrepreneur. In some cases lender made it necessary to provide a security then the loan will be issued. So have some assets that you can show for to be on safer side.

Conclusion

In the present economy, high competition made it difficult to raise funds from loans. Every business needs loan and lenders cannot provide loans to everyone. A business having most feasible revenue status is the first preference for lenders. The entrepreneur should consider above-stated points before applying for small business loans. These points will help to guide a business about what a lender looks at a business while financing or providing loans and how to prepare for the same.