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Do you have a business or would you like to start a business? The main reason most companies fail is that they do not have access to adequate financing for their businesses. 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 don’t meet all the criteria for conventional financing, you may still qualify for a business loan, even as a start-up business. That is the role of Venture Capital and Private Equity Financing
You may have heard of the 3 “Cs” of loans or maybe the 4 “Cs.” They are VSash flow VSrepeated, VSollateral and VScharacter. The first three “Cs” are objective. They are tough and fast with little to no gray area. For example, if the program requires a minimum credit score of 680, you either have it or you don’t. Whether the requirement is a specific minimum cash flow or net operating income, or a specific acceptable collateral value, you have them or you don’t. While the last “C” (Character) is subjective. This means that the insurer considers the information as positive or negative and determines whether or not to finance a limit agreement.
Let’s take a closer look at these Qualifications.
CASH FLOW: Most programs specifically state what the cash flow requirements are to qualify for financing. Even if the additional capital improves cash flow, the underwriting is based on historical numbers with the greatest weight applied to what you are doing now and what you have done more recently. In other words, you must currently 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 business cash flow. Alternatively, if you can’t demonstrate a positive increase in cash flow, that might be reason enough to deny a traditional bank loan or convention.
If you are applying for a business income loan, you may qualify solely based on the average monthly income the business generates. This means that the loan is a cash flow loan. In addition, venture capital and private equity loans are made on the basis of their projected cash flow versus 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 only one of the criteria to subscribe a company 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 can 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 mistake is that everything is based on the credit score. When credit is being analyzed, a lot more criteria come into play besides score. Length of credit history, number of accounts, high credit limits are all part of checking a credit profile. Simply put, a young person with 1 credit card with a credit limit of $ 500 and a history of good payments of 1 or 2 years who has the same credit score as a middle-aged person with a 25 year credit history $ 25,000 credit limits and many open accounts, both active and paid-as-agreed accounts do not have the same credit profile. They can have the same score.
Ultimately, there are programs that are based strictly and exclusively on credit score and credit profile. They are riskier than someone who qualifies for all the criteria. Higher risk for the lender carries 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 Warranty has two purposes. The first purpose is to indemnify the lender in the event of loss. The second purpose is to deter losses. For example, if a borrower had 2 loans, one secured and one unsecured, and the borrower could only afford one that would be repaid.
Like cash flow and credit, there are programs that make loans strictly on collateral. These are typically privately financed deals and the terms are much higher than conventional loans.
CHARACTER: Some financing programs consider character criteria in the objective requirements to qualify for financing. Consider the minimum time in the commercial amount of cash reserves in the bank. These are character requirements equivalent to a rejection in some funding programs or are considered offsetting 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 the lender’s risk reward requirements.
RISK VERSUS REWARD: Loans that meet all the conventional guidelines have the lowest risk, and therefore the lowest rate and lowest costs. Any loan that lacks cash flow or credit or collateral has higher risks and therefore higher costs. As a business owner, you must determine whether the costs of borrowing money are beneficial to your business and whether your business will grow profitably due to financing. If that’s the case, financing is good for your business, regardless of the costs. The only point is, you should always determine that you are getting the best deal that you qualify for. Venture capital and private equity financing will have higher costs, but as a business, this type of financing can help you start or grow to new heights when conventional options are not available.
