Do you have a business or would you like to start a business? The main reason most businesses fail is that they do not have access to adequate financing for their business. These are the criteria needed to qualify for a business loan. If you meet all the guidelines, you’ll qualify for the best rates and terms with the lowest costs. If you don’t meet all the criteria for conventional financing, you may still qualify for a business loan, even as a start-up. That is the role of Venture Capital and Private Equity Financing
You may have heard of the 3 C’s of Loans or perhaps the 4 C’s. Is it so againstash Flow, againstrepeat, againstcollateral, and againstto bully. The first three “C’s” are objective. They are tough and fast with little to no gray areas. For example, if the program requires a minimum credit score of 680, you either have it or you don’t. Whether the requirement is for a specific minimum cash flow or net operating income, or a specific value of acceptable collateral, you either have them or you don’t. While the last “C” (Character) is subjective. That means the underwriter views the information as positive or negative and determines whether or not to fund a dodgy deal.
Let’s take a closer look at these Ratings.
CASH FLOW: Most programs specifically state what the cash flow requirements are to qualify for financing. Even if the additional capital would improve cash flow, the underwriting is based on historical figures, with the greatest weight being applied to what you are doing now and what you have done most recently. In other words, you must be generating enough cash to be able to pay off the new loan. Rarely will a lender base an approval on the impact the additional funds will have on the cash flow of the business. Alternatively, if you can’t demonstrate a positive increase in cash flow, that could be reason enough to deny you a conventional or traditional bank loan.
If you apply for a Business Income Loan, you may qualify solely based on the average monthly income generated by the business. This means that the loan is a cash flow loan. In addition, venture capital and private equity loans are made based on the strength of your projected cash flow compared to historical cash flow.
CREDIT: There is a common misconception that if you have good credit you qualify for a loan or if you have bad credit you don’t qualify for a loan. Credit is just one of the criteria for signing up a company or individual for financing. Yes, a credit score is very important as it shows past performance and is a statistical indicator of future performance. Since such a low credit score can be grounds for denial in some programs and others, a high credit score with an acceptable credit profile is the only criteria needed to qualify. The second misconception is that everything is based on the credit score. When analyzing credit, there are many more criteria that come into play besides the score. Length of credit history, number of accounts, high credit limits are all part of a credit profile review. Simply put, a young person with 1 credit card with a $500 credit limit and 1-2 years of good payment history who has the same credit score as a middle-aged person with 25 years of credit history Credit limits of $25,000 and many active open accounts as well as many accounts paid as agreed do not have the same credit profile. They can have the same score.
Ultimately, there are programs that are strictly and solely based on credit score and credit profile. They are riskier than someone who qualifies for all the criteria. With higher risk for the lender, higher costs for the borrower.
COLLATERAL: To reduce the risk of loss on any loan, lenders require collateral so that, in the event of default, they can be repaid. The guarantee has two purposes. The first purpose is to indemnify the lender in case of loss. The second purpose is to determine the loss. For example, if a borrower had 2 loans, one secured and one unsecured, and the borrower could only repay one, which would be repaid?
Like Cash Flow and Credit, there are programs that will lend strictly with Guarantee. These are generally private finance deals and the terms are much higher than conventional loans.
CHARACTER: Some funding programs factor character criteria into the objective requirements to qualify for funding. Consider the minimum time in the commercial amount of cash reserves in the bank. These are character requirements equivalent to a rejection in some financing programs or are considered compensating factors in others. There are no loans for people who do not have positive cash flow (historical or future), positive credit, or collateral, but have good character qualities. All loans must make financial sense and meet the lender’s risk reward requirements.
RISK VERSUS REWARD: Loans that meet all conventional guidelines have the lowest risk and therefore the lowest rate and costs. Any loan that lacks Cash Flow or Credit or Collateral has higher risks and therefore higher costs. As a business owner, you need to determine if the costs of borrowing money, regardless of the costs, are beneficial to your business and your business will grow profitably due to the financing. If that’s the case, financing is good for your business regardless of the costs. The only point is that you should always determine that you are getting the best deal that you qualify for. Venture capital and private equity financing will be higher costs, but as a business, this type of financing can help you get started or grow to new heights when conventional options are not available.