Almost every business needs money at some point to sustain and grow. Ideally, the working capital of any business should come from the revenue generated by the business. But sometimes the revenue becomes insufficient when compared to the need. In such conditions, businesses had to get external funding. The funding for a business can come in various forms such as business loans from banks, funding by investors or by selling the shares of the company. When you apply for a new business loan from any bank or from any lender, they follow a protocol to evaluate your loan application. Lenders use the protocol of 5 Cs to gauge the creditworthiness of a business. If you can make the lender is satisfied with these 5cs, it widens the path of getting a successful business loan. In today’s article, we will learn about these 5 Cs so that you get a hassle-free and fast business loan.
Here are the 5C’s of a Business Loan Eligibility
The first ‘C’ of 5cs is the Character. The term ‘character’ denotes the type of business for which the loan is asked for. The character of a business is gauged primarily by checking the credit history of the business. The credit history of business reveals how was its credit-related behaviour in past. If the business has any outstanding loans or was the business regular in repaying the previous loans can be traced by checking the credit history.
While checking the character of a business, along with credit behaviour the lender checks the general experience of your business. A lender checks the industry in which your new business will operate, the profits and losses of previous years prior to sanction the loan.
The capacity of a business is the repayment capacity of the loan taken. The repayment capacity is gauged by checking borrower’s debt-to-income (DTI) ratio. The DTI is calculated by adding up all outstanding loan including the applied one and finding out the total monthly outgo. If the total monthly outgo is more than 40% of the monthly average income of the business, the lenders may not grant you a loan. Lower the DTI, better the chances of getting approval on the loan. However, different lenders may take different DTI as eligible for a business loan. Along with the DTI, the lenders also check how a borrower is planning to repay the loan. In addition to examining income, plan to repay the loan, the lenders also do look at the length of time an applicant has been into the business.
Capital is the third C of 5 Cs. The capital of a business is the amount of money the business is worth of. The lender checks the capital of a business to understand the circumstances if the business becomes unable to pay off the loan. So the lender checks how much of money is invested in that particular business. The higher capacity of the business denotes that the loan is granted to a safer entity. The capital of a business is also gauged by the down payment of a loan. The maximum loan down payment makes the lender put trust on the borrower.
The next C of 5cs is the condition which includes the current state of the economy, the lending protocols by RBI, industry trends etc. Some of these conditions are beyond the control of the borrower. But a lender will want to know how the borrower may react if such situations occur in future which you are not ready to face. Lenders will want to know how one plan on using money in the current economic situation and on upcoming days.
Most of the business loans are secured loans and hence the need of collateral is obvious. Loan collateral is an asset of the borrower against which the loan is provided to the loan seeker. There are many assets which can be used as a business loan collateral such as residential or commercial property, inventory, the future income, types of machinery etc. The maximum amount one can avail as a secured business loan depends a lot on the repayment capacity of the borrower as well as the market value of the loan collateral. In the cases of non-payment of EMIs, the lender will have to authority to sell the loan collateral.
The Last Words
If you understand these 5 Cs and how they impact the approval or rejection of a business loan your chances of getting the loan will surely be enhanced. As a potential business loan borrower, being aware of these 5 Cs will help you to prepare yourself and your business to get a financial boosting from external sources. If all the 5 Cs are strong in your business, getting approval on your business loan will never be a challenging task for you.