The 7 Cs Of Small Business Lending: Factors To Consider Before Financing

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Whenever making major business improvements, like opening a second office or simply implementing major change, business financing is necessary.

The situations in which the company will manage to gather all the needed funds alone will be quite rare. Getting business financing is something that is highly intimidating for most managers.

There is this clear fear of failing to use the money properly or getting the amounts needed, mostly because of the economic downturn that appeared.

Some business managers resort to car title loans online only to get something extra. This would be a mistake since those loans are designed for personal use. Business financing loans are still available from banks. The only difference is that banks are offering small business loans in a different way, with more caution put into analyzing the company.


The 7 Cs of small business lending:

  1. The CharacterThis is a highly subjective evaluation, some factors for “character” criteria are: business experience, business knowledge, personal and/or business credit history, references, education, work experience, etc.
  2. The CapacityFactors for capacity criteria are: ability to pay back, cash flow of the business, Payment history (previous loans), additional sources of income that can be used to repay a loan, etc.
  3. Credit Score
  4. Capital
    Factors for capital criteria are: business owner’s investment into their own company, there is no fixed amount or percentage that the owner must be vested in his/her own company before he is eligible for a business loan. However, most lenders want to see at least 25% of a company’s funding coming from the owner.
  5. CollateralCollateral is various forms of assets can act as another method of repayment, collateral would include: equipment, real estate, inventory, account receivables, and securities.
  6. Confidence
    A successful borrower instills confidence in the lender by addressing all of the lender’s concerns, with an honest reputation, a good credit history, reasonable financial statements, good capitalization and adequate collateral.
  7. Conditions
    An overall evaluation of the general economic climate and the purpose of the loan.

What you should always remember is that the bank wants to know exactly what the money will be used for. That is especially the case when the financing is necessary to launch a brand-new company.

That is why you need to basically work harder to show that you are getting money based on a very good plan that is bound to be successful. Also, it is really important to consider absolutely all financing options available since bank loans may not be the only thing needed. You can always look for partners or angel investors, as examples.

Business Impact

As you take out any loan or look for any amount for financing, you have to properly assess business impact. Specific uses should be laid out before you receive the money. Many business managers first get the money and then use it for something else than initially intended. This is a huge mistake that normally leads to the money not being properly used.

Financing Types

The most common financing types include SBA loans, bank loans, venture capitalist funds, borrowing from people you know and crowdfunding. When thinking about small businesses that perform scientific research, various other options are possible. Keep in mind that you may be faced with some specific loan types available based on the reason why the financing is needed in the first place. The best example of that is the loan that is specifically designed for opening a company.

Advantages And Disadvantages

Always think about both the advantages and disadvantages of every single financing option that is available for you. For instance, with grant money you will get financing that does not have to be paid back but you have to show that you did exactly what you said you would with the funds or you could be faced with fraud charges. Borrowing from friends normally does not include interest but the amounts are normally smaller than what you could get from a bank.

Business Potential

Last but not least, getting financing when there is no expansion possibility or you simply cannot do much with the money that you get is a huge mistake. Be sure that you think about business potential whenever financing is obtained so that you can know whether or not the money is needed in the first place.

Boris Dzhingarov

Boris Dzhingarov Verified account

Branding and marketing consultant at Dzhingarov.com
Boris Dzhingarov graduated from University of National and World Economy (UNWE) in Sofia, Bulgaria with a Bachelor's degree in marketing.
Boris Dzhingarov