th images menu user export search eye clock list list2 arrow-left untitled twitter facebook googleplus instagram cross photos entrep-logo-svg

Understanding credit in 5 C\\\'s

What you need to know before you borrow money
By Entrepreneur Staff |

Funding your business is one of the major concerns of entrepreneurs, especially startup ones. The most common solution is to get a loan or credit line from a lending institution.

Unlike in previous years wherein getting a loan is as difficult as getting a visa, most lending institutions now offer easier terms and less stringent requirements for their loans or credit lines to micro, small, and medium entrepreneurs. However, the basics of credit remain the same.

To help you better understand what credit is all about, Entrepreneur Philippines listed down in their March 2011 issue the 5 most important C’s of credit. Lending institutions, banks included, give out loans based on these five principles:

Capacity to Pay: How exactly will you pay back the money you borrowed? Does your business or intended business have a promising cash flow? Do you have a record to prove that you can pay? Records of former loans could help, and alternative sources of payment can help prove your capacity to pay.

Capital: The amount of money you have invested in your business tells a lot about the commitment and risk you’ve been willing to take to ensure its success. A business with your own assets invested is more convincing than a business that is heavily dependent on borrowed money.

Conditions: What are you going to use the money for? Is it for expansion? Upgrading of equipment? Adding inventory? Is the business still sound? Is your industry still profitable, or is it losing demand? In a nutshell, will the money the bank lends you make money?

Character: This is subjective but it is still important. Have you made a good impression with your lender? Have you come across as trustworthy? Do you have a prior good working relationship with the bank? You may need to present references, and even your resume, to help determine if you’re good for the loan, and if you have the experience or the know-how to manage your business.

Collateral: This is a pledge assuring your lender that whatever happens, they will get back their money. It can be in the form of an asset—the common use for the word “collateral”—or a guarantee from someone who signs a form, which will hold that person accountable for your loan in case you fail to make payment (called the “co-maker” of your loan).

ADVERTISEMENT - CONTINUE READING BELOW

Latest Articles

Close