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Capacity = to repay the loan
Character = Habit of using the loans
Collateral = It will be collateral or non collateral
Conditions = What conditions should be made
Collection = The business should be routed to bank for collection or PDC cheques should be offered
Bankers evaluate the small business in the context of the5 C's in order to allocate their limited funds. Make sure your loan application addresses each of these points in detail and you will be more successful in getting your funding.
1. Capacity
In the opinion of the bank, the first "C", capacity, may be the most important. Capacity refers to the ability of the firm to repay the loan. In your loan application, you must discuss exactly how and when you intend to repay the loan. Not only do you need to state your revenues and expenses, but you also need to indicate the amount of your cash flows and the timing of your cash flows with regard to repayment. Capacity also refers to your credit history. Do you have a good credit score? The bank will look at your past repayment history, both business and personal. Don't forget to indicate every possible source of repayment at your disposal in your application.
2. Collateral
Collateral is a distinct relationship to capacity. Collateral refers to forms of security you can provide to your bank or other lender. Collateral may be buildings or equipment owned by your small business or by you personally, including your home. Collateral may also include a guarantee by someone else that, in case you cannot repay the loan, the other party will. As money gets tight in the economy, there is an increased chance that banks will require loan guarantees in addition to collateral. You may know loan guarantees by the term "co-signer."
3. Capital
Capital, in this context, represents the owner's investment in the business. Before applying for a bank loan, the owner has to have a significant investment in the business before a lender will even consider making a business loan. The loan officer will look carefully at the amount and quality of capital the owner has to offer.
4. Conditions
Conditions are two-fold. First, conditions refer to the overall economic climate and external environment surrounding the bank and the business firm. During a recession or periods of tight credit, it is obviously more difficult for a small business to repay a loan and more difficult for a bank to find the funds to loan. It becomes even more important for the small business firm to present an iron-clad loan application to the bank. The second part of conditions refers to the intended purpose of the loan. Are you buying new equipment for expansion? Are you replenishing working capital to prepare for seasonal inventory buildup? Why do you need the money? Spell it out in detail in your loan application.
5. Character
Character is often a subjective judgment made by the banker about the prospective client. The lender decides if the client is trustworthy with regard to repaying the loan and generating a return on the investment. This is where the education and experience of the client comes into the picture. Your references and background in your industry are considered by the financial loan officer.
Thanks for all the answers
You explain very well Sir.
