Minority and women owned businesses have a more difficult time accessing capital than firms owned by white males. The reasons for this vary and include issues such as lower credit scores, shorter business lifespans, and institutional bias against women and minorities. But other, more practical factors are frequently in play as well. For example, some emerging businesses simply don’t have the hands-on experience necessary to successfully apply for a small business loan.
Getting a small business loan is nothing like applying for a credit card. Lenders want to know a great deal about you personally and about your business before they invest in your success. So it’s important to have all of your proverbial ducks in a row before you apply. This includes things like well-designed business and marketing plans, financial statements, tax returns, and more.
What Underwriters Want
At minimum, most underwriters want to know that your company has a solid history of business success before they will grant you a business loan. You will generally need to submit the following records and documents with your application in order to demonstrate this:
- Three months of bank statements from your firm’s main operating account
- Two years of business tax returns
- Detailed records of other indebtedness, including the original balance, monthly payments, remaining balance, and maturity date.
- Gross revenue from previous years
- Proof of how you will use the funds
Additionally, the lender will assess your creditworthiness, or how likely it is that you will be able to repay the loan. There are several factors that go into this assessment. These are often referred to as the “Five C’s” of credit analysis. Below we explain what they are.
What Are the Five C’s?
The Five C’s are five factors that underwriters use to assess your ability to repay a business loan. They are also used in surety bonding because they are an effective way to determine if your business is financially sound. When you apply for a loan, be forthcoming with this information. It’s far better to over deliver than to make the lender come back to you several times for information you failed to provide.
Here’s a quick review of what the Five Cs are and what they mean.
Your character is a measure of who you are. Lenders want to know that potential borrowers are trustworthy, stable and dependable before they agree to a business loan. They determine this by looking at factors such as your credit score, credit history, and, increasingly, your online presence and customer reviews. They may also want to see references from clients with whom you have done business in the past.
Lenders want to know you are invested in your business and motivated to do what it takes to succeed. So if you are applying for a loan to expand your business, it’s a good idea to have some “skin in the same,” rather than expect the lender to take on all the risk.
Capacity refers to your ability to repay the loan. Lenders want to know that you have sufficient operating capital to sustain your business while making payments on the loan. Providing documents such as debt and liquidity ratios, cash flow statements and loan repayment history will help them determine this.
If you are applying for a loan to help with a temporary cash flow problem, be prepared to show growth and revenue projections that demonstrate how and when you will be able to pay the lender back.
Many lenders require some sort of collateral to guarantee the loan. This may be in the form of real assets such as your home or other real estate, accounts receivable or business inventory.
This last of the Five C’s is nevertheless an important one. It refers to the conditions in your industry that may affect your ability to repay a loan. This includes economic and industry factors over which you probably have little control. In that case, plan ahead. Apply for business line of credit while your company is doing well to protect against market downturns. Much like a credit card, the funds will be available when you need them, and you don’t have to repay anything until you access them.
Get Help Before You Apply
Being prepared is the best way to meet any challenge. So, to maximize your chances of being approved for a business loan, ask for help before you apply. The Small Business Administration provides free counseling to small business owners who need help with the application process. Find a counselor in your area by visiting your local SBA office, or search for help online using this interactive map.
About The Carmoon Group
The Carmoon Group Ltd. is a minority-owned insurance brokerage headquartered in Hicksville, New York. Through our large network of nationwide affiliates, we offer risk management solutions and comprehensive insurance programs for businesses in a wide range of industries. We have the expertise and experience to provide you optimal coverage at the best possible price. So why not give us a call today to set up an appointment for your insurance review? Or if you prefer, just reach out online and we’ll get back to you at a convenient time.