The 6 “C’s” Of Applying for a Business Line of Credit (LOCs)

August 8, 2016, 7:19 pm Posted by: Lori Askins Category: Financing & Investing

From startups to seasoned entrepreneurs looking to expand their company, small business’ apply for lines of credit for a multitude of reasons. The decision on whether or not the small business is deemed eligible for a line of credit is dependent on a variety of factors. In order for a lender to decide if a small business is eligible, the lender will require the business to meet some basic qualifications.

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To make a fair assessment whether or not the small business qualifies for capital in the form of a line of credit (LOCs), an analysis of the 6 “C’s” is conducted. The 6 “C’s” of lending are character, capacity, capital, collateral, conditions and credit score.

Here are the 6 “C’s” lenders look for when evaluating a potential borrower:

Character:

When a lender or creditor decides whether or not to approve the line of credit (LOCs), you need to show that your payment history is on time, every time. When a small business lives up to financial and credit agreements and pays on time every time, it shows that the business was responsible in the past and will continue to be in the future. Therefore it is imperative to keep track of all the business’ expenses and make sure to always be in good standing with current creditors. By doing so, the business is portraying a sign of good faith and character and appears trustworthy. This sign of good character shows that if a line of credit (LOCs) is extended to the small business, they will pay it back and not default on the capital.

Capacity:

This factor is quite logical and is determined by the small business’ capacity to pay back the line of credit (LOCs). When determining eligibility for a line of credit, a potential lender or creditor wants to know if you will have enough cash to pay back the capital after all your expenses are dealt with.

For example:

If your small business is earning $10,000 every month and your monthly expenses are $9,000, but you are requesting a line of credit that would require you to pay back $2,000 every month --- the lender wants to know where and how you are going to get that extra $1,000 to pay back every month.

Therefore the small business needs to show that there will be enough money left over after paying off the monthly expenses to repay a line of credit (LOCs). Startups tend to have issues proving capacity as there is no current revenue and therefore no proof to how the line of credit (LOCs) would be repaid. Fortunately, if the small business has a credit score that is average to good, it can still be eligible and would benefit from a line of credit that had 0% APR. This type of LOC would give the startup company time to become established and bring enough revenue to repay the capital.

Capital:

A potential lender or creditor will also assess your capital. But what is capital? Capital is what you are left with after you subtract all your debts from your assets. Lenders and creditors like to see that you have enough capital to repay a line of credit (LOCs).

Collateral:

In layman language, this is the same as capital with the exception that instead of money, there are assets involved such as property. This guarantees commitment on the borrower's part that he is willing to respect the terms of the line of credit entirely. In case the small business fails to comply with the agreed clauses, the collateral would be given up to the lender or creditor. Unlike most lenders and creditors, BR Finance Solutions does not require a small business to put up any collateral. We only offer non-collateral lines of credit, because a small business should be given the chance to succeed not be set up for failure.

Conditions:

As the name suggests, these are the contingency factors involved while a borrower is interested in taking a line of credit. As a custom, the lender would require transparency as to what the money will be used for. What are the risks involved with the particular way that the borrower is willing to spend the money? Would this yield enough return? Is the overall economy favoring this transaction or not? All these questions are imperative when the lender or creditor makes a decision.

Conversely, BR Finance Solutions has no conditions. Your small business is eligible to use the line of credit for any use it deems necessary. Whether your small business needs capital to purchase more inventory, buy new equipment, expand or renovate the current location, it doesn’t matter. We believe that you should be in charge of how you spend your money as nobody understands your small business better than you. Why should the lender decide how it should be spent? The lender is not running the day to day aspects of the business. As such, we firmly believe you should be able to use the line of credit (LOCs) as you see fit.

Credit Score:

A credit score is a financial jargon that is comprised of 5 aspects of the small business’ credit history; payment history, credit utilization, length of credit history, and new credit and credit mix. Whether you had previous lines of credit and repaid them on time, maxed out your business lines of credit, or had many lines of credit at once and owed substantial money on all of them, will determine your business’ credit score. If you always paid on time, never maxed out your credit, show that you have had credit for a fair amount of time and you are able to manage having different types of credit, then your credit score will be good to excellent. However, if your small business had financial troubles in the past, the credit score may be considered bad or poor. Some lenders or creditors will require the small business to have exemplary credit scores. Fortunately, BR Finance Solutions can provide lines of credit (LOCs) to startups that may not have any established credit or to a small business with good credit or bad credit. No matter the situation BR Finance Solutions can custom tailor a solution to your needs.

Related:

Practically speaking, applying for a line of credit (LOCs) will require the small business to meet certain factors depending on the lender’s terms and conditions. These 6 “C’s” are just as important as those requirements. If you are concerned about obtaining approval for a line of credit, begin by identifying the answers to these six factors and you will have a better understanding of where your small business stands.



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