Do you have a business or would you like to start a business? The main reason most business fail is they lack access to adequate funding for their business. These are the criteria necessary to qualify for a business loan. If you meet all the guidelines you will qualify for the best rates and terms with the lowest costs. If you do not meet all criteria for conventional financing you may still qualify for a business loan, even as a start up company. That is the role of Venture Capital and Private Equity Financing
You may have heard of the 3 “C”s of lending or maybe 4 “C”s. They are Cash Flow, Credit, Collateral, and Character. The first three “C”s are objective. They are hard and fast with little or no grey area. For instance if the program requires a minimum credit score of 680, you either have it or you do not. If the requirement is for a specific minimum cash flow or net operating income, or a specific value of acceptable collateral you have them or not. Whereas the last “C” (Character) is subjective. That means the underwriter looks at the information as a positive or minus and determine whether to fund a borderline deal or not.
Lets look more closely at these Qualifications.
CASH FLOW: Most programs state specifically what the cash flow requirements are to qualify for funding. Even if the additional capital would improve cash flow, the underwriting is based on historical numbers with the most weight applied to what you are doing now and what you have done most recently. In other words you must be currently generating enough cash to be able to afford the new loan. Rarely will a lender base an approval on the impact the additional funds will have on the business cash flow. Alternatively, if you can not demonstrate a positive increase in cash flow, that could be reason enough to deny a convention or traditional bank loan.
If you apply for a Business Revenue Loan you may qualify solely based on the average monthly revenue the business generates. This means the loan is a cash flow loan. Additionally, Venture Capital, and Private Equity Loans are made on the strength of your projected cash flow versus the historical cash flow.
CREDIT: There is a misconception that if you have good credit you qualify for a loan or if you have bad credit you do not qualify for a loan. Credit is but one criteria in underwriting a business or person for financing. Yes a credit score is very important as it shows past performance and is a statistical indicator of future performance. As such a low credit score may be a reason for denial in some programs and in other programs a high credit score with an acceptable credit profile is the only criteria necessary to qualify. The second misconception is every thing is based on the credit score. When credit is analyzed there are many more criteria that come into play than just the score. The length of credit history, the number of accounts, the high credit limits are all part of the reviewing a credit profile. Simply put, young person with 1 credit card with a $500 credit limit and 1 or 2 year history of good payments who has the same credit score of a middle aged person with 25 years of credit history $25,000 of credit limits and many accounts open active as well as many accounts paid as agreed do not have the same credit profile. They may have the same score.
Ultimately, there are programs strictly and solely based on credit score and credit profile. They are riskier than someone that qualifies for all criteria. With higher risk to lender comes higher costs to the borrower.
COLLATERAL: To reduce risk of loss on any loan lenders require collateral so that in the event of a default they can be repaid. The Collateral serves two purposes. The first purpose is to indemnify the lender in event of loss. The second purpose is to deter loss. For example if a borrower had 2 loans, one with collateral and one without collateral, and the borrower could only pay one which would get paid?
Like Cash Flow and Credit, there are programs that will lend strictly on Collateral. These are generally private funding deals and the terms are much higher than conventional loans.
CHARACTER: Some financing programs factor Character criteria into objective requirements to qualify for financing. Consider minimum time in business amount of cash reserves in the bank. These are character requirements equal a turn down in some financing programs or are considered compensating factors in others. There are no loans for people who have no positive Cash Flow (historical or future), no positive Credit, or no Collateral, but have good character qualities. All loans must make financial sense and meet risk reward requirements of the lender.
RISK VERSUS REWARD: The loans that meet all the conventional guidelines have the least risk and therefore the lowest rate and lowest costs. Any loan that lacks Cash Flow or Credit or Collateral have higher risks and therefore higher costs. As a business owner you must determine if the costs of borrowing money, regardless of costs is beneficial for your business and your business will profitably grow because of the financing. If that is the case the financing is good for you business regardless of costs. The one point is that you must always determine you are getting the best deal you qualify for. Venture Capital and Private Equity Financing will be a higher costs but as a business this type of financing can help you get started and or grow to new heights when no conventional options are available.