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Your Credit and Your Business

Credit Analysis
Regardless of where you seek funding - from a bank, a local development corporation, or a relative - a prospective lender will review your creditworthiness. A complete and thoroughly documented loan request (including a business plan) will help the lender understand you and your business. The basic components of credit analysis, the "Five C's," are described below to help you understand what the lender will look for.

The "Five C's" of Credit Analysis:

Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships - personal or commercial - is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent (other) sources of repayment. For information on managing credit contact the National Foundation for Credit Counseling. To obtain a copy of your credit report contact:

Experian
P.O Box 2104
Allen, TX 75013-2104
Tel: 1-800-392-1122
      1-800-682-7654

Equifax
P.O Box 105873
Atlanta, GA 30348
Tel: 1-800-685-1111

Trans Union
P.O Box 390
Springfield, PA 19064
Tel: 1-800-915-8800

Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Prospective lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding.

Collateral or guarantees are additional forms of security you provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can not repay the loan. A guarantee, on the other hand, provides that someone else signs a guarantee document promising to repay the loan if you can not. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender also will consider the local economic conditions both within your industry and in other industries that could affect your business.

Character is the general impression you make on the potential lender or investor. The lender will form a subjective opinion as to whether or not you are trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience levels of your employees also will be taken into consideration.

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