3 Essentials for Landing a Business Loan

The traditional three Cs of Credit -- character, capacity and capital -- provide a good basis for evaluating a loan applicant. Character always refers to the ability to handle the day-to-day obligations and responsibilities of a business. Capacity is the ability of a company to produce revenue to offset its growing obligations. Capital is the ability to conduct business as usual even when there is a shortfall.

CHARACTER. How can character be assessed? One way is a personal interview and visit to the potential customer. This is not always cost-effective, so more pragmatically, character can be assessed by checking the trade and credit references given on the credit application. Since most times credit information will not be given over the phone, have a standard letter prepared to mail to all references listed, with an easy return envelope.

The information requested can only be historical data, such as credit limit, high credit, the last 12 months and payment history (such as prompt, 30, 60 or 90 days past due) etc. The evaluation will be based on past sales and credit within the framework of your credit requirements. If the applicant has no track record, the account should be considered marginal. This essentially means that the customer is too new to their industry. You have three options at this point. The first is to give the customer a limited line of credit and hope for the best.

The second is to obtain a personal guarantee. This is an ideal opportunity to obtain a personal guarantee, as the customer is eager to establish credit. You can establish a relationship while, at the same time, adding some protection for your business. Also, asking for a personal guarantee can help you assess whether the applicant feels comfortable with the future of his business. If the applicant rejects the personal guarantee, then you have more of a reason to decline the open terms.

The third way to work with a new customer with no credit history is to sell the account on a COD basis at a discount. At least this will give you a starting point to establish a long-term relationship with the customer and keep his costs down, too. As time moves on, you can again review your customer's payments for further credit consideration.

CAPACITY. The second big C of establishing credit is capacity. This is the ability of a company to produce revenue to offset its growing obligations, in other words, the ability to operate at a profit. You can check this through bank references, credit industry groups and credit reporting services. A good credit application (if signed) will allow you permission to obtain credit and financial information concerning the applicant at any time from any source. A copy of the signed credit application should be sent along with a prepared letter to all bank references listed.

CAPITAL. If the company is able to fund its day-to-day operation, does it then have the third C of credit--the capital to conduct its business during a shortfall? One way to evaluate this is to check with the customer's bank for a secured or unsecured line of credit. If the line of credit is unsecured, assets would be available to support the account in the event of a shortfall. If the bank has a secured line of credit, then, if a shortfall occurs, the bank can extend the line of credit or call in the loan based upon a review. Obviously, if a company has excellent references, is financially stable and has assets, it becomes an excellent credit candidate.

In the case of marginal credit accounts, credit should only be extended in limited amounts. Out of every 100 businesses, only 20 will remain into the third year. You as a credit manager are expected to determine which 20 will be operational when it’s time to pay your bill. This can be difficult, but if you do your homework at the front end you will at least achieve a higher percentage of success at the back end when collecting.

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