Five Factors That Banks
There are five factors that banks look for before making a loan to you, or any businessperson. These are called the "five C's" of lending or borrowing. You must be prepared to demonstrate all five when you approach a bank for a loan.
1. Collateral. First, banks look for collateral. What assets are you going to put up to cover the loan? Collateral is something that can be sold for cash fairly quickly to repay the bank in case your business is not successful.
2. Character. Banks look for character. What is your previous track record with regard to loans? What kind of character do you have, in terms of honesty and dependability? Who knows you? Who will vouch for you?
3. Credit Rating. Banks look at your current credit rating. How much money have you borrowed and repaid in the past? How good is your credit history today? Your credit rating is a very precious thing that follows you wherever you go. I have known many people whose entire adult lives have been ruined because they have been sloppy or indifferent with their credit. They have failed to make credit card payments, utility payments, or rent payments when they were due. In one or more of these cases, they have been reported to a national credit bureau. This negative credit rating has then dogged them for as long as 10 years, wherever they went, anywhere in the country. Don't let this happen to you.
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4. Capital. Banks want to know the amount of capital you have. How much of
your own money are you willing to invest? This is a measure of how deeply
committed you are to the success of the enterprise.
5. Confidence. The last factor that banks use to determine whether to lend
you money is their level of confidence in you. In the final analysis, the
individual banker must have confidence that you are the kind of person who is
going to succeed in the business that he or she is lending you money to start
of build.
Banking Relationships Mature over Time
Borrowing money from banks is a progressive series of financial transactions
that develop over time. When you first attempt to borrow money, most banks will
want $5 worth of collateral, personal investments, and other assets for every
$1 that they will lend you. They will also want personal guarantees that extend
beyond bankruptcy, should you declare it. But after a bank has several years of
experience with you and comes to know and trust you, its lending requirements
decline, step by step.
Action Exercise
Begin building up a solid credit rating by borrowing and repaying early. Visit
and get to know your bank manager. Build your reputation for character and
competence.
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