Five basic credit qualification criteria for small business loans

Regardless of where you decide to access your business financing, you will need to follow through on a detailed credit process to optimize your chances of loan approval.

But did you know that your financing request will be evaluated using five basic categories, known as “the 5 Cs of Credit”? Most lenders will use these five categories to evaluate your credit worthiness and determine the strength of your application.

1.Capacity

How much financing can you carry? The lender will want to know how you will meet the obligations of your loan payment by assessing your business cash flow and revenue. Your repayment history will also be considered so if you have a habit of making late payments, it could jeopardize your ability to qualify.

2. Capital

Since you are asking the lender to risk their money on your venture, how much cash are you prepared to risk and what money do you have to fall back on should you have a shortfall? Remember that lenders want to minimize their risk as much as possible so when you are looking for funds, you need to demonstrate, through your capital input, that you do have some “skin in the game.”

3. Collateral

What assets or property can you pledge as security against the loan? If a borrower cannot repay their loan, the lender will take possession of the collateral that was offered. Borrowers can pledge existing land or buildings that they own, machinery/equipment, life insurance policies and even accounts receivables. A lender may also request the personal endorsement of a guarantor (that person who would agree to pay off the loan, if you are unable to).

4. Conditions

What is the purpose of the loan? How will the funds be used? The lender will assess how the funds will be used in relation to the condition of the business as well as current local market conditions. Positive conditions would improve the likelihood of obtaining the loan.

5. Character

Will you repay the loan and how does this reflect in your character? Essentially a lender is looking for your patterns of repayment, are you a reliable borrower, do you show consistent tenure and stability, commitment and loyalty or are you unreliable and a quitter? These are all important factors when assessing the character of a borrower.

If you are declined for financing, the reasons typically fall into one of the following categories — insufficient collateral, insufficient sales or cash flow, poor or lack of credit experience or history, project was considered too risky or the business operates in an unstable industry.

Understanding the five Cs of credit will help you enter into the loan application process with a good understanding of what to expect.

Accessing financing is an important part to starting or expanding your business. In Canada, small and medium-sized businesses can access loans through banks, credit unions, insurance companies, finance companies, and venture capitalists. There are also government-assisted programs that cater to small business depending on the size and nature of the business.

Lets take a look at how much financing activity Community Futures Entre-Corp has managed in our 30-year history: We have approved just over $32 million in loans which represents more than 1,000 loans to local start-ups and existing businesses who have in turn created mor than 3,400 new jobs in our community. We can lend up to $150,000 with a flexible fully-open payment term to start a new business, buy an existing business, finance renovations, equipment, expansion or working capital.

Community Futures is positioned as Canada’s most established “business development” organizations. We know that a prosperous business community creates new jobs and that leads to a healthy sustainable community. We will continue to support start-ups, business acquisitions and expansion in our community with our flexible financing program.

Community Futures Entre-Corp has been supporting small business since 1988. We provide the tools and guidance you need to run your business. For more information about our programs and how we can connect you with helpful resources, please call Community Futures at 403-528-2824.

Elizabeth Blair is the regional innovation network coordinator for APEX. APEX supports the growth of innovative and technologicallyoriented businesses in Southeast Alberta. APEX is a collaborative initiative between three core service providers: Community Futures EntreCorp, Medicine Hat College and Alberta Innovates.