Do you have the six C’s of good credit?
Considering refinancing a loan? Or borrowing money to pay for a big expense? With interest rates still low, and more financial institutions willing to lend, this may be the right time to consider accessing capital.
It’s also a great time to review what criteria lenders look for in a borrower and more clearly understand what factors they may consider in making the decision to approve or decline your application.
Before sitting down with your lender or submitting that online app, ask these questions to ensure you meet the six C’s of good credit:
Do you have a solid CREDIT SCORE?
Banks look at your personal credit history as a good indication of how you handle your money–even for business loans. So, it’s a good idea to request a copy of your credit report and fix any discrepancies before you apply for a loan so there are no surprises. You can request your free credit report and check your credit or FICO score at annualcreditreport.com or with any of the major credit agencies.
On annualcreditreport.com, you can get a free copy of your credit report from all three credit reporting agencies every year. Or you can contact the three credit reporting agencies, Equifax, TransUnion, and Experian, separately to get your free credit report annually.
It’s also important to know whether or not you have a good credit score. While banks and other lending institutions all have their own guidelines, in general, a good score is 700 or better. If you know there is something on your credit report that might be considered negatively and there is a very good explanation for it, discuss it with the bank up front. Banks don’t like surprises, so being proactive shows that you’re honest and not trying to hide something.
Are there favorable CONDITIONS for repaying the loan?
This is simply shorthand for how you will use the proceeds of the loan. How much do you want to borrow? What will you use it for? Common uses for personal loans include repaying debts, funding medical costs, and paying for big events like a wedding.
Many business owners now are borrowing to finance expansion, invest in technology and, in general, innovate their operations to incorporate new standards that can address sustainability, and other trends.
Lenders will look at how you plan to pay back the loan, and what you have to offer as collateral or fallback if your main source of repayment fails.
Do you have the CAPACITY to pay back the loan?
Capacity means cash flow.
For personal loans, cash flow is your income minus your expenses over a certain period of time, typically a month. For businesses, cash flow is defined as sales, minus operating expenses, plus depreciation and amortization expense, plus interest expense. In either case, the amount left over is the cash available to pay back debt—and your ability to repay a term loan.
With a term loan, what lenders want to know is if you generate enough cash flow to cover the monthly loan payment. With a line of credit, lenders may determine whether your cash flow can support monthly interest payments; and for business loans, if the collection of accounts receivable and/or sale of inventory can repay the principal amount outstanding on the line of credit within a one-year period.
Do you have the essential COLLATERAL to secure the loan?
To ensure that you have an alternative and adequate source of repayment, lenders want to see the hard assets you have to secure the loan. Using collateral for personal loans may help borrowers qualify for a larger amount of money, lower interest rates, or flexible terms. For business owners, if the collateral doesn’t quite cover the loan amount, you may want to explore a loan that carries a guaranty from the U. S. Small Business Administration (SBA).
Do you have the reputation and CHARACTER for paying your bills?
With lending, your character counts. Lenders need to assess how well you repay your financial obligations, your reputation and all of the preceding C’s of credit. Just a few examples that may show your character include:
- Being a law-abiding citizen
- Having a good personal or business credit history
- Honesty— especially throughout the loan process
Do you have the necessary CAPITAL to make a down payment?
This is an additional consideration for business owners. Capital is the cash you “invest” in a loan. Typically, banks will not finance 100 percent of the cost of an asset. So, you need to be prepared to make a down payment toward the equipment, building, business, or anything else you want to finance.
The willingness to put some of your own money in is a sign of your commitment to the business. If you are not willing to commit your own cash to your business, it is unrealistic to expect a bank and/or any potential investor to lend money or make an investment either.
The good news is if you’ve answered “yes” to these questions, you have the six C’s of good credit. Ready to apply? Learn how to take the next step.
The opinions and views in this blog post are those of the authors and are not intended to provide specific advice or recommendations for any individual. Please consult professional advisors with regard to your individual situation.