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“5 C’s” of SBA loans: Capital, Credit, Collateral, Capacity, and Character.
What are they?
– Capital
– Credit
– Collateral
– Capacity
– Character
Capital: Also referred to in the industry as equity injection, capital is your skin in the game in the lending transaction. No bank will fund your business at 100 percent of your total cash needs. If you’re creating a new business, typically the bank will require you to contribute 30 percent. If you’re acquiring an existing business, expect your contribution to be 20 percent.
Credit: Credit comprises your personal credit score, your credit history and an analysis of your credit utilization. A new trend in SBA lending is that banks may also utilize the FICO Small Business Scoring Service (SBSS) to assess your credit risk. If you can’t meet the minimum scores (which vary among lenders), you’ll need to step back and take the time to improve your credit score and your credit presence.
Capacity: Capacity or cash flow represents your ability to generate income that will pay your debts. If you’re starting a new business, the bank assesses your global cash flow — your current personal income as well as your projected income from the business. If you’re acquiring an existing company, the lender wants to see that the last three years of business tax returns reflect positive cash flow and profit.
Character: Character isn’t a question of your personal charm — it’s your business character the bank will assess. What’s your experience in business in general, and in the industry in which your new business will operate? Have you managed profits and losses successfully in your previous business or for an employer? Have you worked your way up through an industry and gained experience in multiple aspects of its operations?
Collateral: Entrepreneurs can also be badly caught off guard by the SBA’s stance on collateral. The SBA expects its loans to be fully secured, but will not generally decline a loan based on inadequate collateral, assuming the borrower satisfies the other standards for capital, credit, capacity and character. However, if you have what the SBA terms “worthwhile assets,” then the lending bank will require they be used as security for the loan.
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