Finding finance for business is the most important topic for entrepreneurs. Many aspiring and small business owners often remain in a dilemma as how to approach financial institutions for funding purposes. Six useful tips about what bankers look for in entrepreneurs while considering financial proposals and grant of micro loans for small business fall under the ‘Six C’s of Credit’ and they are as under:
Six C’s of Credit
- Capacity: This is based on the amount of debt that a business can support. In fact, credit decision is justified by the debt-to-net-worth ratio. A business that is highly leveraged having high debt/net worth ratio is less credit worthy than a company with low leverage.
- Character: Personal character is very important as all loans made to small businesses require personal guarantee. The character of an individual is determined based on his past interaction with banks. For that reason, personal credit history and business credit history are reviewed.
- Collateral: This is considered to be a secondary source of loan repayment. Lenders want their borrowers to start repaying loans from their profits and inventory. But incases where things go weird, collaterals assure safety to bankers.
- Conditions: Credit decisions depend on regional and national economic conditions. In case a bank is made to believe that a depression is on the way then it won’t be extending credit easily.
- Contingency Plan: A useful financing tool is the contingency plan. Contingency plan is a short business plan that determines the options that entrepreneurs would be considering and how these options shall be treated.
- Credibility: Business plan makes it possible for entrepreneurs to answer bankers’ questions. Credibility of business and research plans are researched upon for better chances of success.
By training and temperament, bankers are risk-averse. They are unable to take risks that venture capitalists or private investors might take up. Bankers simply do not rely on surprises. So, misunderstanding is inevitable between small business owners and bankers. It is very important to initiate a business-like relationship between small-business owners and bankers.
This article was submitted by Rohit Arora, co-founder of Biz2Credit. Biz2Credit is a small business marketplace that connects entrepreneurs with financing options and advice to grow their business. Send all questions to