5 Cs To Think About Before Applying For A Business Loan
Sep 12, 2023
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As a business owner, you may need additional funding to help grow your business in terms of expansion, acquiring equipment, and adding more products or services, to name a few.
Applying for a business loan can be a great way to get the capital you need, but it's important to carefully consider your options before taking on debt. Here are five Cs to think about before applying for a business loan.
Capacity
Before taking out a loan, you must consider your business's capacity to pay first. No matter if you are planning to apply for personal loans, sameday loans, or business loans, you must first think whether your business can afford to repay it or not.
The capacity of your business will be determined by its debt-to-income ratio. Lenders use the debt-to-income ratio to help them decide whether to grant your business loan application. You can also calculate your business's DTI ratio to know if your business is capable of taking a business loan by:
(total debt ÷ total income) x 100
You want to get a lower DTI to qualify for a loan because it indicates that you can repay your loan better. It will benefit both you and the lender since you won't experience too much stress in repaying your business loan and won't be a risk to the lender.
Collateral
A collateral is an asset that you will pledge to the lender as a security for the loan. Thus, before applying for a loan, you must first consider if your business already owns assets that can be offered as collateral. However, keep in mind that if you offer collateral for your business loan, you are giving the lender the right to seize your asset in case you default on your loan.
Defaulting on a loan means that you fail to pay your debt as agreed in the loan agreement that you signed.
Your asset will act as the payment of the loan that you acquired. That's why lenders will only approve collaterals that cost more than the amount you are borrowing. If you're thinking of what assets your business has that can be used as collateral, you can check the list we created below:
- Business equipment
- Vehicles
- Personal assets
- Cash
- Investments
- Inventory
- Real Estate
- Accounts receivable
Character
Your character is The next C you must consider before applying for a business loan. Character doesn't concern the borrowers but is a crucial factor for the lenders. Lenders will look at your character as a business owner to identify if you have the willingness to pay, integrity, morality, and responsibility.
One way of showing strength in character is to have a good credit record and a steady payment history. If your business has already established its credit record, the lender will be looking at both your and your business's character.
Before applying for a business loan, you must review and understand your credit report. Remember to check both your personal and business credit reports to ensure that you will know if you are eligible for a business loan.
Conditions
When taking out a business loan, factors outside the business must also be considered. That's what you call Conditions. All factors affecting the business's ability to repay the debt must be considered when taking out a business loan.
These external factors can be competitors, market conditions, and trends impacting the business's ability to earn revenue. As you can see, all the mentioned conditions will significantly impact your business's health. That's why lenders will go beyond to check for these conditions.
As a borrower, you must find ways to differentiate your business from your competitors. Show the lenders what makes your business better than the others. You must also devise a strategy to show the lender how to protect your business from market fluctuations and how flexible it is in adapting to new trends.
This way, you can increase your chances of getting approved. Take your time preparing to prove to the lender that your business can repay the loan you are applying for.
Capital
Finally, the capital of your business is the last C that you need to consider when applying for a loan. Capital is the amount of money a business has. It can be retained earnings, personal investment in the company, and the like.
Lenders see a significant capital contribution as an indication that the borrower is unlikely to default. Your business' DTI ratio will also play a significant role in determining if you have favorable capital that lenders will see fit to be eligible for a business loan.
Aim to have lower than 50% DTI for your business if you want to be qualified for a business loan. Start calculating your current business DTI and determine whether you are now eligible for a loan.
Final Thoughts
Contrary to what many believe, having a business doesn't automatically qualify you for a business loan. Lenders will still examine your business before determining whether it's eligible. That's why you should be familiar with the five Cs of business loans to know what to expect and what to improve on your business to increase your chance of approval.
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