The 5 C's of Credit - Capital
Are you feeling better about seeking credit? We’ve talked about you, as the business owner & your past experience, how the company’s financial ability will help make debt payments, and how the company assets can be used to fall back upon if needed. Making it this far has been more about the business but now we go one step further to ensure you are 100% committed to making this investment – putting your own capital into the equation.
Just like on ABC’s Shark Tank, entrepreneurs go in asking for an exchange of business ownership for one or more of the Shark’s “capital” or money. Capital is the money you put personally towards helping the business grow. Lenders may refer to this as putting “skin in the game.” The request for capital lets the lender and the bank know you are serious and equally, if not more, vested into your business than the lender intends to be. If you are not vested, how can you expect a perfect stranger (lender) to be?
How do you know how much to contribute? This will vary by bank and customer situations, but a general request is 20% to 25% of the total loan request to be contributed by you. However, that money will be used towards the purchase of equipment, real estate, etc. The tradeoff to putting in more of your own money is that debt terms may be more favorable such as lower rate or payment terms. This again shows how committed you are to the business and how financially stable you are to help ensure the business stays on the right path towards success.
Next month: Conditions – the last part that may impact getting a loan