Where you need to expand your business or need extra cash to grow your inventory, a business will always encounter times where a loan would be necessary. Cash is an important part of business growth.
And to make more money, you will need money to spend first to create additional source of income. To make more sales, you will need to spend for additional materials to increase your inventory. To tap a market outside your local area, you will need to put up an office in a new location.
But not every time we apply for a loan, it is granted. It takes a borrower’s convincing powers to make a lender agree that they are qualified for a loan. In the financial world, there are 5 C’s that are being considered by the lender before granting a loan. Knowing about these 5 C’s will help you prepare well to get that loan you are applying for granted.
It is important that we are aware of character. When a lender makes a credit investigation, they identify the character of the business or individual. If you are a business, they identify how long you have been operating and for an individual how long have you been working. They would also want to know how you deal with your suppliers and customers as they would foresee how well you would work with them. Understanding you as an entity or as a person gives the borrower an idea on what to expect when dealing with you.
This is where the lender would evaluate your capacity to pay. Identifying how much cash and how much you earn. Knowing what your expenses are and what existing loans you may have. Understanding your financials allows the lender identify if you can pay the loan at a given term.
Another aspect that a lender checks is your capital or your net worth. This shows the lender an idea to recover the loss in case of insolvency, death or even disability. This is your total assets less your total liabilities.
It is the security which you can offer to make sure that the lender recovers the loan amount in case of unexpected circumstances. This gives the lender the capability to sell the asset in case of default on payment whatever the reason may be. Some lenders even go to the extent of requiring a guarantor or co-signor.
Conditions refer to the outside aspects that may affect the repayment of loan. It can be economic difficulty for those applying for a business loan or critical illness for an individual.