| Posted on | others
An In-Depth Guide to Understanding and Exploring the 5 Cs of Business Loans
0
An In-Depth Guide to Understanding and Exploring the 5 Cs of Business Loans
As an MSME business owner it is very common to have a need for Business Loans. The reasons for needing a business loan will be different for each business depending on what stage of growth they are in. It could look challenging to successfully get your loan application approved and to get the required loan amount disbursed to your business bank account. But there are some specific things you could keep in mind to increase your chances to get your MSME business loan approved. As you may already know business loan lenders do a lot of checks and verification from their side before approving loan application requests and the business owner needing credit should be aware about them.
5 Cs of Business Loans
The 5 Cs of Business Loans is part of a framework used by loan lenders to assess the creditworthiness of a business financing borrower. Each "C" stands for a key factor that contributes to the overall risk profile of the loan. Let's delve deeper into each C to understand its significance:
Character
Character refers to the borrower's reputation and credit history. To put it simply, the lender would try to understand and process every possible information that is out there about your MSME and you personally as a business owner like the track record of managing finances responsibly, meeting past loan obligations, and ethical business practices. Lenders will evaluate your personal credit score, business credit history (if applicable), and references from previous lenders or business partners. Showing a good history of responsibly paying back borrowed capital and ethical business management will increase confidence for lenders to give you a loan.
Capacity
Capacity refers to your business's ability to generate sufficient cash flow to service the loan repayments. Lenders will look into business’s statements, including income statements, accounted balance sheets, and cash flow projections if any etc. They will check your current profitability, revenue sources, and debt-to-income ratio to decide if your business can really be able to pay back loans if given. Having a strong financial performance with a steady and predictable income stream demonstrates your capacity to repay the loan on time.
Capital
Capital refers to the financial investment you, the borrower, have made into your business. This includes your own personal investment, retained earnings, and any equity contributions from partners. A strong capital contribution demonstrates your own commitment to the success of the business and reduces the lender's risk. Lenders view a borrower with "skin in the game" as more likely to manage the business responsibly and prioritize loan repayment.
Collateral
Collateral is more like a guarantee for the lenders to give you a loan. The assets you own are usually considered as the guarantee. In case if you fail to pay the loan the lender would claim your collateral. One of the most common needs for a bank to give you a business loan is needing to pledge collateral against your needed loan amount which makes it very difficult for a small business owner to get his loan disbursed. In such situations a business owner should look out for lenders who are not peculiar about needing collateral. NBFCs in the market don't mandate a business to submit collateral and are very well known for Collateral free Business loan. Not every business has assets to pledge.
Conditions
Conditions refer to the broader economic environment and the specific terms of the loan itself. The economic climate of your industry, prevailing interest rates, and the overall health of the economy are all factors considered under conditions. Additionally, the loan terms like interest rate, repayment period, and loan purpose all play a role in the lender's decision. A strong business plan outlining the intended use of the loan funds and how it will contribute to future growth strengthens your application.
Importance of the 5 Cs of Credit
Think of 5Cs like a guide on “do and don’ts to get a business loan”. A strong showing in each area significantly improves your chances of loan approval and can also lead to more favorable loan terms. Here's why understanding the 5 Cs is crucial for business owners:
- Increased Loan Approval Rates: If all the C’s are addressed properly by you and your business your chances of getting that very needed business loan is going to increase.
- Improved Loan Terms: Since the 5 Cs being taken care properly will make your business resume look good in the eyes of the lender you will have more advantage when it comes to having a negotiation on various things like time to pay back, the applicable rate of interest etc.
- Stronger Financial Management: Following this framework and paying attention to your cash flow, accounting, statements etc will make your business more responsible from a financial point of view.
Conclusion
As a business owner looking forward to a MSME specific business loan you should focus on ensuring you have the 5Cs paid attention to and taken seriously which will increase your chances for a successful loan approval. It will be impossible for any available lender to ignore your loan application when you have all the requirements of a lender fulfilled. If you are a small business owner an NBFC business loan lender will be the ideal solution for you as they are known for serving small businesses much better than mainstream lenders like banks.