March 8, 2011 Objective: Students will identify what characteristics banks are looking for when determining whether to extend a loan.

Lending money? How does a bank decide to lend you money? Know the 6 C’s of Credit – Character – Capability – Capacity – Collateral – Context – Conditions

Character Are you trustworthy? – Would you want to lend your money to someone who isn’t? Your loan application can be rejected without even reviewing the business idea if the bank feels you aren’t trustworthy. They will ask questions like: – Who are you? – How long have you lived where you live? – How long have you been in business? – Do you live up to your obligations? – What is your standing in the community?

Capability Do you know what you’re doing? Mismanagement is the #1 reason for failure of a new business and banks want to avoid that. Loan officers will ask: – What is your professional background? – What is your previous business experience? You will have a better chance of getting a loan if you: – Franchise – Bring on someone with solid business experience

Capacity Does your business have the ability to make a profit? To determine if you have the capacity to pay back this loan the bank will ask you: – What is your ability to repay the loan? – How will the loan proceeds be used? – How will they be repaid? How soon can you generate positive cash flow? When will you show a profit? How large will it be? Will your profit be lasting? Are you financing with debt or equity?

Collateral Collateral is important but banks put more premium on the potential profitability of your business proposal. Collateral is the “escape hatch” for your bank, so the bank wants it to be sufficient to cover losses and easily convertible to cash. One form of collateral is a personal guarantee from the owners, this shows your commitment to the business.

Context No business exists in a vacuum, and loan officers would look at a number of factors that will impact your business. Are there potential economic, legal, employee, supplier, or environmental problems. Questions like: – Are their environmental issues to be concerned about? – How could these affect the financial condition of your business? Loan officers consider applications more favorably if: – You are introducing a new product or service with obvious demand – There is little competition – Your market has many small independent businesses – Lower rate of failure in your type of business

Conditions The nature of your loan request is another factor that could affect the results of your application. Banks will want to know: – How much money are your requesting? – What will it be used for? – For how long will it be needed?

Assignment 6.2 Write a short answer essay to address the following items: Describe what a bank wants to see before they will lend money to an entrepreneur. What do banks and investors look for when evaluating a proposal? What can you do personally now to improve your personal credit worthiness for the future?