Tag Archives: collateral

5 C's of Credit

The 5 C’s of Credit: 
What Do They Mean To Your Small Business Loan?

One of the most common questions among small business owners seeking financing is: “What will the bank look for from me and my business?” While every bank has its own unique criteria, many use some variation of the five C’s of credit when making credit decisions. Broadly speaking, they are:

  • Character
  • Cash flow
  • Collateral
  • Capitalization
  • Conditions

Let’s take a look at each of these ingredients and review how they may impact your funding request. Review each category, and see how you stack up.

Character ― Your willingness to pay back your loan

What is the character of the management of the company? What is your payment history and patterns in other loans you have taken? What is management’s reputation in the industry and the community?

Bankers want to lend their money to those who have impeccable credentials and references. The way you treat your employees and customers, the way you take responsibility, your timeliness in fulfilling your obligations are all parts of the character question.

This is really about you and your personal leadership. How you conduct both your business and personal life gives the lender a clue about how you are likely to handle leadership as a CEO. It’s a banker’s responsibility to look at the downside of making a loan. Your character immediately comes into play if there is a business crisis, for example. As small business owners, our personal stamp on everything that affects our companies is essential. Because the bank may not know you, your credit score tells the lender how you will pay your business loan. Many times, banks do not even differentiate between us and our businesses. A poor personal credit score is enough information for a lender to outright decline a business loan. In a commercial lender’s eyes, there is no differentiation between handling personal obligations and business obligations. They are one and the same.

Cash Flow ― Your capacity to pay back your loan

What is your company’s borrowing history and track record of repayment? How much debt can your company handle? Will you be able to honor the obligation and repay the debt? There are numerous financial benchmarks, such as debt and liquidity ratios, that investors evaluate before advancing funds. Become familiar with the expected pattern in your industry. Some industries can take a higher debt load; others may operate with less liquidity. As a conservative guideline, you should have $2 of income (business and personal) for every $1 of debt.

Collateral ― How lenders get paid if the business fails

While cash flow will nearly always be the primary source of repayment of a loan, bankers look at what they call the secondary source of repayment. Collateral represents assets that the company pledges as an alternate repayment source for the loan. Most collateral is in the form of hard assets, such as real estate and office or manufacturing equipment. Alternatively, your accounts receivable and inventory can be pledged as collateral. Generally, lenders will want a 1:1 ratio, or $1 of collateral for every $1 you borrow. Bankers typically discount an asset and lend on that basis. So for every $1 of collateral, the bank will lend anywhere from 70 percent to 85 percent of the value depending on whether it is fair market value or liquidation value.

The collateral issue is a bigger challenge for service businesses, as they have fewer hard assets to pledge. Until your business is proven, you’re nearly always going to pledge collateral. If it doesn’t come from your business, the bank will look to your personal assets. This clearly has its risks; you don’t want to be in a situation in which you can lose your house because a business loan has turned sour. If you want to be borrowing from banks or other lenders, you need to think long and hard about how you’ll handle this collateral question.

Capitalization ― How much money have you put into the business?

How well-capitalized is your company? How much money have you invested in the business? Has your business grown? Have you reinvested the profits, or paid yourself a bigger salary? Investors often want to see that you have a financial commitment and that you have put yourself at risk in the company. Both your company’s financial statements and your personal credit are keys to the capital question. If the company is operating with a negative net worth, for example, will you be prepared to add more of your own money? How far will your personal resources support both you and the business as it is growing?

Conditions ― SWOT: What are the Strengths, Weaknesses, Opportunities and Threats that affect your business?

What are the current economic conditions and how is your company affected? If your business is sensitive to economic downturns, for example, the bank wants a comfort level that you’re managing productivity and expenses. What are the trends for your industry, and how does your company fit within them? Are there any economic or political hot potatoes that could negatively impact the growth of your business? (I wrote at length on SWOT analysis in my January blog.)

Keep in mind that in evaluating the five C’s of credit, investors don’t give equal weight to each area. Lenders are cautious. One weak area could offset all the other strengths you show. For example, if your industry is sensitive to economic swings, your company may have difficulty getting a loan during an economic downturn ― even if all other factors are strong. And if you’re not perceived as a person of character and integrity, there’s little likelihood you’ll receive a loan, no matter how good your financial statements may be. As you can see, lenders evaluate your company as a total package, which is often more than the sum of the parts. The biggest element, however, will always be you.

For more information about the five C’s of credit and/or B2B CFO, visit b2bcfo.com.

Marketing mistakes

Beware of Blunders: Common Marketing Mistakes To Avoid

The economic downturn has left many companies struggling to retain existing business, scrambling for ways to attract new business and seeking opportunities to cut costs. Decreasing marketing budgets seems to be a common solution — just look how many publications, creative agencies and printers have gone out of business due to a lack of revenue.

While cutting costs may be a necessity, halting your marketing efforts when business slows can make things worse. Be smart. Think smart. Market smart. Send an email instead of a letter; create and send a postcard instead of a catalog; change your marketing mix, and stay in front of your customers if you wish to maintain and grow your business.

Once business picks up, time may be at a premium; but once again, that’s no excuse for allowing marketing efforts to slip. Keeping a constant presence in the marketplace will ultimately even out your sales swings.

To use your time and marketing dollars wisely, and steer your business toward growth, take note of six common marketing mistakes to avoid:

Mistake #1: Marketing without a plan

It doesn’t have to be long or elaborate, but a “road map” of how to market your business is nothing short of essential.

Mistake #2: Muting the agency

Even if you pride yourself on your marketing prowess, don’t override your agency’s recommendations. This can, and often will, lead to disaster. Listen to the hired experts providing recommendations based on sound research and experience.

Mistake #3: Multitasking collateral

Don’t expect one marketing piece to meet too many objectives. Doing so can muddle your message and lose or confuse your prospect or customer.

Mistake #4: Cluttered collateral

Filling every inch of a marketing piece with words or pictures is a turn-off. White space rests the eye, is more inviting and entices your audience to read, making key messages easy to find and digest.

Mistake #5: Focusing on features before benefits

Features define your product, but benefits sell. Focusing on the benefits defines your unique selling proposition, sets you apart from the competition and helps you to sell a product or service.

Mistake #6 Keeping your team in the dark

The fastest way to waste hard-earned marketing dollars is forgetting to inform your staff on how to communicate marketing offers and information to customers and prospects. Consider the sales clerk who doesn’t know about a current promotion to help sell additional products to existing customers. Or the courier in the supply room who might have a friend interested in the current offer or coupon. Always include the entire team in your marketing plan by engaging them in how to use each tactic to increase business.

Finally, don’t find yourself falling into the trap of W4TP2R marketing. Give up? This stands for the marketing approach known as Waiting for the Phone to Ring. Just because you send out letters, emails and press releases, place ads, or launch a new website doesn’t mean that merchandise will fly off the shelves right away. Effective marketing takes diligence, persistence, repetition, follow-up, follow-through and time to bake.

Give your programs a chance, stay consistent and work it. Eventually, you will see results and reap the rewards.

On April 10 the marketing community and the world suffered a great loss when Sherri May’s life was taken abruptly. Her marketing know how, spirit, and words of wisdom live on and inspire through her team at Sherri May & Co.