The 5 Cs to Remember When Applying for an SBA Loan

If you plan to start a new business or expand your current one, for example, by having a responsive website, you are likely to seek funding. In fact, there are many entrepreneurs who apply for business loans every year, including the Small Business Administration (SBA) loans through approved lenders.

Prior to applying for an SBA loan, it’s very important to evaluate the current climate for such lending. Evaluating a small business’s creditworthiness may include several factors. Most traditional lenders and bankers always rely on what is called the “5 Cs.”

The 5 Cs are easy to remember and often cover the critical questions most approved lenders would want to know. It’s therefore very important to know what exactly the lender is looking for.

Here are the 5 Cs you must always remember when seeking for an SBA loan: Alternatively take a look at this informative article — How to apply for an SBA loan in 4 steps.

1. Credit

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First, credit is what most bankers and/or traditional lenders look at when evaluating the borrower of any small business.

Even the banking institution that wants to offer the borrower the benefit of the doubt will more likely have a certain threshold of a personal credit score that you, as the borrower, can’t go below.

You should also know that every lender or banker weighs such credit score differently and in some cases, may have different thresholds.

For example, if you opt to approach a bank, you will need to have a personal credit score of at least 680. This is because the SBA usually guarantees a loan with a personal credit score of 650 and over.

However, many non-bank lenders can go lower than that given that other metrics, such as cash flow and time in business, are sufficient. These provide information on whether you will repay your loan or not.

Additionally, although this only refers to your personal credit score, your business credit profile can also make a great difference when seeking an SBA loan.

2. Capital

Lenders and any other financial institutions like to see that the borrower has invested some of their own capital into a promising venture. They also want to see your capital amount that exceeds the loan amount you are seeking.

If your lender sees that you invest your own cash into your business, they may feel you are likely to repay if things get tough on your side.

Having some amount of money on hand for your daily needs and even some savings for difficult times also tells your lender that the SBA loan you are seeking isn’t your final effort to keep you running for the next few months/years while your small business falters.

3. Character

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Just as with your personal credit score, most lenders or bankers are interested in your character as well, although they usually consider your personal credit score to be part of your character equation.

Most of them realize that there are very few perfect borrowers and so they must look at your history as a small business owner, your business reputation, and your management team experience within the industry.

If such factors look satisfactory, even if the business credit profile or your credit score is less than perfect, you may likely qualify for an SBA loan.

4. Capacity

This is one the reasons why a lender may ask you about cash flow and revenues so that they can evaluate whether you have enough cash to repay your loan or not. This is how they determine if you can make your loan payments or not.

No banker should be interested in giving any amount of loan to a small business owner who does not have the ability to repay the loan. This makes an SBA loan difficult, especially for early-stage startups that are not generating any revenue yet.

5. Collateral

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Traditional lenders and bankers always look to secure assets, such as equipment and real estate, as collateral, although if you have anything else of value that is relatively liquid, it can also suffice.

In all circumstances, the collateral minimizes the risk to the lender by providing something of equal value in case of a default. Although not every lender looks at collateral in the same manner, always be ready to be asked about whether you have anything of value as a collateral to secure your loan or not.

Now that you know all the 5 Cs, you can always look at your small business objectively and determine whether you can measure up. Wanting funding for a responsive website will not be doable if you can’t get an SBA loan.

Finding the best ways to effectively mitigate weaknesses is what determines who finds business financing and success, and who doesn’t.

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Originally published at on May 9, 2016.

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