Do you have a trade or would you like to start a business? The main reason for the failure of most businesses is that they do not have access to adequate financing for their business. These are the criteria needed to obtain a business loan. If you follow all the instructions, you will be entitled to the best prices and conditions with the lowest costs. If you do not meet all the criteria for conventional financing, you may still be eligible for a business loan, even as a start-up. This is the role of venture capital and private equity financing
Maybe you’ve heard of 3 “C” loans or maybe 4 “C”. They are Cash flow, Creturns Clateral, and Ccharacter. The first three “C’s” are objective. They are hard and fast with little or no gray area. For example, if a program requires a minimum credit score of 680, you either have it or you don’t. If there is a requirement for a specific minimum cash flow or net operating income or a specific value of acceptable collateral, you have them or not. While the last “C” (character) is subjective. This means that the subscriber views the information as positive or negative and decides whether to finance the frontier trade or not.
Let’s take a closer look at these qualifications.
CASH FLOW: Most programs specifically state what are the cash flow requirements to qualify for funding. Although additional capital would improve cash flow, underwriting is based on historical figures with the most weight applied to what you do now and what you did last. In other words, you currently need to generate enough cash to be able to afford a new loan. Rarely does a creditor base an agreement on the effect of the additional funds on the company’s cash flow. Alternatively, if you cannot demonstrate a positive increase in cash flow, this may be reason enough to refuse a conventional or traditional bank loan.
If you apply for a business income loan, you can qualify solely on the basis of the average monthly income that the business generates. This means that a loan is a cash flow loan. In addition, venture capital and private equity loans are provided based on your projected cash flow compared to your historical cash flow.
CREDIT: There is a misconception that if you have good credit, are eligible for credit, or if you have bad credit, you do not qualify for credit. A loan is just one of the criteria when subscribing to a business or person for financing. Yes, a credit score is very important because it shows past performance and is a statistical indicator of future performance. A low credit score may be a reason for rejection in some programs, and in other programs the only criterion required to qualify is a high credit score with an acceptable credit profile. The second misconception is that every thing is based on a credit score. When credit is analyzed, many more criteria come into play than just scores. The length of the credit history, the number of accounts, high credit limits are part of the assessment of the credit profile. Simply put, a young person with 1 credit card with a credit limit of $ 500 and a 1 or 2-year history of good payments who has the same credit score as a middle-aged person with a 25-year credit history of $ 25,000 with credit limits and many accounts opened as active many accounts paid under the agreement do not have the same credit profile. They can have the same score.
Ultimately, there are programs strictly and exclusively based on credit score and credit profile. They are riskier than someone who meets all the criteria. The higher the risk for the lender comes the higher the cost for the borrower.
COLLATERAL: To reduce the risk of losing any credit, creditors require collateral so that they can be repaid in the event of default. The security serves two purposes. The first purpose is to compensate the creditor in the event of loss. The second goal is to prevent loss. For example, if a borrower had 2 loans, one with collateral and one without collateral, and the borrower could only pay one who would get paid?
Like Cash Flow and Credit, there are programs that will lend solely on the basis of collateral. In general, these are privately financed transactions and the conditions are much higher than ordinary loans.
CHARACTER: Some funding programs take character criteria into account in order to qualify for funding. Consider the minimum time in the trading volume of cash reserves in the bank. These are character requirements that are equivalent to a decrease in some funding programs or are considered as compensatory 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 traits. All loans must make financial sense and meet the creditor’s requirements for remuneration for the risk.
RISK VERSION OF REMUNERATION: Loans that meet all the usual rules have the least risk, and therefore the lowest rate and the lowest costs. Any loan that does not have cash flow or credit or collateral has higher risks and therefore higher costs. As a business owner, you need to determine if the cost of borrowing money, regardless of cost, is good for your business and if your business will grow profitably with funding. If so, financing is good for your business regardless of the cost. The only point is that you must always determine that you are receiving the best offer you are entitled to. Venture capital and private equity financing will be more costly, but as a business, this type of financing can help you start or grow to new heights when no conventional options are available.