The 5 Cs of Business Lending

At YEARONE.SOLUTIONS we assess assignees (prospective new retailers) on the following four criteria:

  1. Validity: By verifying identity, we make sure we are actually dealing with whom they say we are dealing with.
  2. Capacity: The financial capacity of the assignee via availability of capital and credit worthiness.
  3. Capability: Experience to operate the business. Whilst it does not have to be retail experience, it has to be relevant and/or there must be a solid built-in suport network.
  4. Preparedness: Have they planned well and are they ready to operate?

I found it interesting to compare to the criteria applied by banks. See below article extracted (slightly amended) from Forbes Magazine:

Credit Score: Although this should not be the most important factor, it is. It’s pretty much a go-no-go measure for most traditional lenders, and although alternative lenders are willing to work with borrowers with low credit scores they all have different credit score thresholds they won’t go below. Lenders uniformly suggest that credit score is really a measure of your willingness and commitment to meet your financial obligations. Even though there are lenders that will work with small business owners with less than perfect credit, your credit score is critically important. For the smallest small businesses, your personal credit score is critically important. When meeting with a lender, you should know your score and be prepared to explain anything negative on your report. Give the lender a reason to look beyond the score.

Character: Hopefully the banker is just as interested in your character as your credit score. The way they judge your character probably has a lot to do with your score. Good bankers consider character an important part of how she evaluates potential borrowers. How she evaluates borrowers might be insightful. She’s not looking for the “perfect” borrower—she knows there aren’t very many of them. What she is looking for is a good management team, realizing that even someone with a bruise or two who has done everything they can to stay current with their obligations, could be a good customer.

Capacity: This is the monthly or annual revenues question. No lender is interested in giving a loan to someone who has no means to repay it. What’s more, even if you have great credit and are in an idea-stage or early-stage startup and have no revenues, it’s probably not a good idea to be looking for financing anyway. I’ve been where you are and understand the desire to get things up and running. Nevertheless, there are times when it’s best to take a slower approach, bootstrap an idea to get it off the ground, or do what most people do and reach out to friends and family.

Capital: The old catch-22: “If I had that, I wouldn’t need a loan from the bank.” Bankers are highly risk averse and want to make sure borrowers have a little bit of skin in the game. From their perspective, the thought is a little skin in the game will make it harder to walk away. It makes sense too, but we all know your blood, sweat, and tears are a pretty substantial investment too. Having some cash on hand for day-to-day cashflow and maybe a little set aside for a rainy day tells the lender the business loan your (sic) looking for isn’t a last-ditch effort to keep your company alive for the next few months while your business continues to falter.

Collateral: Banks and other traditional lenders consider assets like real estate or capital equipment as collateral. Alternative lenders (to be avoided almost at all cost) might consider your accounts receivable or monthly credit card receipts as collateral—whether or not they identify it that way. 

The biggest difference, I suspect, is that we look for reasons to say yes but won’t hesitate to say no. In my experience, banks look for reasons to say no, and will say yes when they have to.

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