The three Cs are as follows:
# 1. Character
In the first half of the twentieth century most banks were small and were local. Banks knew most of their customers personally and had a good idea of the character of each one. These days knowing each customer in-depth is not possible and therefore banks rely on data base searches and credit bureau searches.
These searches provide the bank with vital information about your company’s history (and yours if you are a small company) of meeting its bank, trade and other obligations. If you have had a problem with meeting obligations for some period in the past, bring it up to the bank with a good explanation before they do.
# 2. Capital
Traditionally banks wanted to know how much capital you had in your company and what the value of your assets was. They did not greatly understand the importance of cash flow but now they do and it has changed the definition of capital from static to dynamic. Yes, banks still want to know you have capital at risk in your company, but they also want to understand your ability to generate cash flow and its certainty.
Giving your banker realistic forecasts that include cash flow will certainly increase your odds of success. In the case of term loans, banks like to see cash flow coverage (Free CashFlow / annual debt service) ratios of at least three to one.
# 3. Capacity
This is the ability of your company to repay your obligations. We have already discussed term lending above, so for capacity we will look at your ability to repay short term. The bank will look at your use of working capital, specifically the quality and size of your receivables and the quality and sale ability of your inventory if you have any.
Any shortfall in numbers 2 or 3 will result in the bank asking for personal guarantees. If you have to give them, get a firm understanding of what metrics you have to meet in the future for the bank to release your guarantee. Also, make sure that any agreement you sign requires the bank, in the case of default, to exhaust every remedy against the company before it goes after your guarantee.
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