Finance Your Business: Borrowing Money

The 5 Cs of Credit

Capacity - The borrower's ability to repay the loan from the normal course of business operations.

• Must be able to demonstrate sufficient cash flow to make monthly loan payments
• Existing businesses must be able to demonstrate, through historical financial statements, that sufficient cash flow exists, prior to loan, to support operations.
• The growth of revenues generated by application of the loan proceeds must match the terms of repayment

Character/Credit - The borrower's demonstrated willingness and ability to repay the loan as agreed.

• Must have a clean credit history.
• Start-up business the owner must have clean personal credit, which means, few, if any, delinquencies, no repossessions, and no judgments.

Collateral - Provides a secondary source of repayment for the loan and is critical in start-up situations. Most banks like to be 100% collateralized.

Common collateral values:

• Certificate of deposit 100%
• Stock (publicly traded) 75%
• Vehicles 70%
• Equipment 10%-75%
• Real Estate 75%-80%
• Inventory 0%-35%
• Accounts Receivable 50%

Capital - The amount of equity invested in the business by the owner(s) and/or investors or from retained earnings.

• Banks and the SBA prefer to see at least 30% equity invested in a business.

Conditions - Factors in the economy that might impact the business' ability to repay its debt or deteriorate its collateral position. (Example: A seller of pleasure boats will see a sales decline during a recession.)

Finance Your Business: Capital Sources and Considerations

The following table summarizes the basic elements of the most common sources of capital. The notes for each source are generally true at the present time; however, it should be noted that there are frequently exceptions to some these due to unusual circumstances in the situation of the owner or business.

FAMILY COMMERCIAL BANK / SBA SELF-HELP CREDIT PRIVATE
CONSIDERATIONS & FRIENDS BANK GUARANTEE CREDIT UNION CARDS INVESTOR

Type of Capital	Loan or Equity	Loan	Loan	Loan	Advance	Loan or Equity
Owner Cash Percentage	0% - ??%	25% - 30%	10%-20%	5% - 10%	0%	10%-20%
Collateral Required	none	100%	40% - 80%	minimal	none	none
Credit Rating	N/A	600 +	600 +	500 +	N/A	N/A
Interest Rates	base rate	base rate ++	bank rate +.5% - 1.0% + fees	bank rate + 2% - 3%	bank rate + 5% - 15%	20+% return
Availability of Funds	individual circumstances; depends somewhat on amount	available funds; must demonstrate ability to repay	available funds if bank wants backup; must demonstrate ability to repay	available funds; must demonstrate ability to repay	relatively easy to obtain	difficult to find and obtain capital
Required Information	varies widely; depends on lender & amount	business plan; financial projections; personal financials	business plan; financial projections; personal financials	business plan; financial projections; personal financials	none; personal financials	business plan; financial projections
Control Asserted by Lender	could be considerable	none to some	none to some	none to some	none	could be considerable, especially with equity capital
Consequences of Default	family problems	loss of collateral & company; bad credit	loss of collateral & company; bad credit	loss of collateral & company; bad credit	bad credit	loss of company

Note the following Web sites:

http://www.sbtdc.org/Publications/cap_opps.asp

http://www.sbtdc.org/pdf/startup.pdf

http://grants.gov/ (for grant information)