When you decide to embark on a business venture it is important to have the financial backing necessary to grow at a sustainable rate. That means you need financial assistance like import financing, commercial lending, trade financing, accounts receivable, credit protection, working capital, factoring, or any other service that can protect and grow your business. But both private lenders and public lenders have the ability to deny or avoid financing your project or business.
Because of this, you have to prove to the lender that you have the credit, capacity, collateral, conditions, and capital to show the lender that you and your business venture are a sound investment. Continue reading below as we elaborate on the 5 C’s of credit.
Before a lender, such as ourselves, decides that they are willing to give you the capital loan that you have requested they will assess your character. Essentially, the lender is trying to assess your character and your financial situation in such a way that they can determine if you are trustworthy enough that they can feel comfortable going into business with you.
As a new business owner or someone looking for seed money for their next project, it is important to understand that the evaluation of your trust and fiscal situation is not negative in nature. It is not because the lender wants to make sure that they can get all of their money back as much as it is evaluating whether you have the means to end the working relationship as the borrower someday without digging yourself a hole.
Similar in nature to character, the capacity of a prospective borrower to repay the investment in and to make sure that the borrower will have the ability to successfully pay back the lender and succeed in their business venture.
The most common way this is done is for the lender to determine if the prospective borrower will have the ability to repay the loan is to compare the borrower’s income with their recurring debts. Doing so provides the lender with a debt-to-income (DTI) ratio that illustrates how reliable the prospective borrower will be in making payments on their business loan or capital loan.