On the five Cs of borrowing money

So you want to borrow money from a bank or financial institution . . .

My friend and associate Anita Cameron, the director of business lending for the Northwest Loan Fund, likes to emphasize what she calls the five Cs when it comes to borrowing money. These are good concepts to keep in mind for anyone considering a loan.

Character — Perhaps this goes without saying, but for any institution lending money the character of the lender is very important. For example, does the lender have a track record that reveals honesty in past business dealings and in her or his personal life? Does the borrower appear to be a hard worker? Does the person seem cautious or reckless? All these factors and more go into an assessment of character. In essence, a lender wants to know if its borrower is a good person.

Capacity — This means, simply, does the borrower have the capacity to repay the loan. This can be determined by a close look at cash flow projections and budgets for the project being considered. This may also involve and evaluation of the potential borrower’s existing financial situation; such as money in the bank, real estate, etc.

Capital — This is a reference to the age-old condition that most any bank or institution likes to see with borrowers: Does the borrower have any skin in the game? This could be in the form of a major investment by the borrower in business-related equipment and real estate, for example, before borrowing any money. This could involve the borrower agreeing to work extra outside the target business in order to provide operating funds for the inevitable slow times that take place at the start of any new venture. This could mean that the borrower, simply, has a lot of his or her personal money sitting in the bank to back the business for operations and other purchases for the business as it proceeds. This shows, simply, commitment on the part of the borrower.

Collateral — This is normally either cash or assets (such as machinery, cars or real estate) that the borrower “puts up” as security for a loan. To put it in the most simple terms, this means someone borrowing money needs to agree that a bank or financial institution can take from the borrower cash, equipment or other things of value set aside by the borrower if the loan is not repaid. People need collateral, most of the time, to borrow money.

Conditions — What is the situation in the local or national economy during the time of the loan? Is it in a recession or is business likely to grow? What are the interest rates and are they at a level that allows a fair investment? Is the business proposing a good idea at the right time in the right place, or is the timing all wrong and does the business represent an old idea that won’t work in the current period? This could even mean an evaluation of the borrower’s personality to determine, simply, if this person is truly ready to borrow money and truly ready to run a business.

While Anita likes to use the five “Cs” to explain what to expect when contemplating borrowing money, most any of the fine financial institutions in Grand County that lend money would surely agree that they use similar criteria to evaluate loan prospects.

So keep the five Cs in mind when pondering borrowing money for any enterprise in Grand County.

Patrick Brower is the Enterprise Facilitator for the Grand Enterprise Initiative. He offers free and confidential business management coaching to anyone who wants to start or expand a business in Grand County. He can be reached by calling 970-531-0632 or at patrickbrower@kapoks.org.

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