Getting A Grasp Of The Four C’s Critical For Business Credit
You might have been a little intrigued about the title of this article. The four C’s that I was referring to were nothing but character, capacity, capital and conditions. These 4 C’s will essentially dictate the quality and quantity of credit that will be made available for your small business when you apply for a loan.
This article will briefly go over each one of the 4 C’s. You can then evaluate yourself to gauge your financial strength as seen in the eyes of lending institutions.
Character – Just like a person’s character, the character of a business will be taken into account before a loan is awarded. A lending institution like a bank will check up on various things such as size of the business, number of employees in the business, duration of existence and so on. Essentially, a character check on a business will be a reputation check on the business to see if they have made news for either the right or the wrong reasons.
Capacity – Capacity of a business is nothing but its ability to repay. The bank will analyze financial statements such as balance sheet, cash flow and the income statement to gauge the financial strength of the business. The bank will need to feel confident about the financials of a company, especially its cash flow, before they release the funds of a loan to your business. If your business has a struggling cash flow, it is highly unlikely that a bank will award you a loan for your business. Also, the bank will be interested in the amount of debt or credit that your business already carries.
Capital – Capital analysis will involve a close scrutiny of a company’s balance sheet to assess its working capital and net worth. High net worth will allow a bank to consider giving your business a loan as the bank can use your assets as a guarantee or collateral.
Conditions – The bank will also analyze the market conditions in which your company operates. Every industry operates in a different financial environment which means that some industries are high risk while some are low risk. It will also take into account other factors that might be affecting a business such as political environment, legislative changes and foreign exchange conditions. It might also consider special conditions such as the quality of your customer base to check if your business is dependent on very few customers.
Depending on how you fare with the 4 C’s, the bank will decide whether or not to approve your loan and it will also decide how the terms for the loan will be structured based on the above 4 C’s. The stronger your fundamentals, the better the deal you will ultimately get.