Would Your Business Meet the Banks’ 5Cs of Credit?

Steve O'ConnorBank Loans, Business Plans, Cashflow, Funding Options, Small Business FinancingLeave a Comment

If, like many small business and restaurant owners, your business is operating in an environment where you can’t meet the banks’ rigorous credit requirements, you’re not alone. But you do have alternative financing options to consider. Read more.

At the end of July, The Huffington Post published to its blog an article titled The Five C’s of Credit for Small Business Owners. This interesting read (find it here) gave us insight into how banks think about small businesses and their access to credit. To recap:

  1. Capacity: can you pay back the small business loan?
  2. Collateral: can you back your loan with small business assets?
  3. Character: what’s your business history, experience, and trustworthiness?
  4. Conditions: how do customers, competitors, and costs affect your small business?
  5. Capital: what do you have in the bank today?

These financial metrics are vitally important to your business’s creditworthiness—at least, as far as the banks are concerned. But what about small business owners whose “five Cs” don’t meet the banks’ criteria? Since 2008, there are many more small business owners whose capacity, collateral, conditions, and capital are suffering. How do you fund your short term business needs when you can’t lean on the bank?

Look at Alternative Financing Options to Meet Business Objectives

If, like many small business and restaurant owners, your business is operating in an environment where meeting all five Cs isn’t in the cards, you do have alternative financing options to consider. These include:

  • Credit cards: As one of the biggest sources of financing for small business owners, credit cards offer both benefits and drawbacks. On the plus side, credit cards can provide rewards—airline miles, cash back, discounts, and so on—when the accounts stay in good standing. They are relatively easy to get and require no collateral. On the down side, high, variable interest rates; late payment fees; annual fees; and the option to make only the minimum payment can all lead to unmanageable debt for your business.
  • Line of credit: A small business line of credit is appropriate for businesses that are affected by seasonal operational fluctuations and/or variable capital demands. Like traditional bank loans, lines of credit require you to demonstrate positive cash flow; but lines of credit are similar to credit cards with ability to continuously repay the debt and then borrow back against it.
  • Merchant cash advance: A merchant cash advance allows small businesses to pre-purchase credit card sales. For example, a restaurant could negotiate with a merchant capital advance provider to receive a lump sum payment of $80,000 as an advance on future credit card sales. The repayment amount is negotiated with the provider, and a portion of future credit card sales is directed toward repayment until the advance is paid in full. Typically, small business owners have six to ten months to finish paying the advance. Similar to credit card financing, the application process is simple and streamlined and does not require collateral, but businesses do have to prove their credit card sales.

Every small business is different and has different financial objectives. Analyzing at the alternative financing solutions requires careful consideration of your current situation and how best to meet the working capital needs of your business.

 

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