Bizstartup.ie - Biz Centre

Finance providers focus on the 5 C's to arrive at a lending decision: character, capacity, capital, collateral and conditions.

Character

Good character is a basic prerequisite for any borrower. Honesty, integrity and reliability are the qualities that mean you will make every effort to repay your debt. In relation to your business, you need to be able to demonstrate that you are an effective manager with a good reputation. It’s also important to be honest and upfront about your credit history and any business problems you may have had. How you resolved these will, of course, be helpful in determining how they effect your application.

Capacity

You will need to show how your business will generate sufficient cashflow to repay the credit facility you are seeking. Detailed financial forecasts must show how repayments will be generated. Beyond this, you will also need to explain your capacity to repay the credit facility if the business does not develop as planned. Other sources of income (such as investments), skills you could use to earn income, or the support of an earning spouse, could provide a sufficient back up plan.

Capital

Business capital is split between the equity (the money that the owners and investors have put into the business) and the debt (money borrowed from banks or other sources). Equity capital acts as a cushion to absorb first losses, while debt capital must be repaid to the lender however the business fares. Since debt capital also comes at a cost of interest, the more debt a business has relative to equity, the higher the level of risk. Start-up businesses potentially can be a high risk for lenders, so if you are seeking to borrow money for a new business AIB will, like most lenders, need to see that you have made a reasonable financial investment.

Collateral

Collateral is the security given to a lender for protection in case the business cannot repay the loan. It can be any one of a range of business and personal assets, including buildings, vehicles, machinery, land title and business debtors. If the business cannot generate enough cash to repay the credit facility, the lender may have recourse to the collateral. But for AIB, as for most lenders, recourse to collateral is always the last resort: the business must be the main source of repayment and so credit will only be given if the business is assessed as capable of repaying the credit facility. It is always advisable to seek independent legal advice before providing collateral against credit facilities.

Conditions

Conditions and trends in your sector and the overall economy are crucial factors in determining the success of your business. Opportunities or threats to your business can arise from external factors such as technology, competition, regulation and economic or social changes. You may not be able to control all these factors, but you must be aware of them and be prepared to respond to change. When you look for bank finance, you need to be able to give your assessment of the market and how your business will cope with potential changes in market conditions.

This article appears courtesy of AIB

This article © copyright Allied Irish Banks, p.l.c. 2010. The information does not constitute tax, legal, investment or any other advice by AIB. No representations or warranties are made as to the reliability, accuracy or completeness of the information.