The four Cs of credit

The fours Cs of credit are a common set of principles that banks and lenders consider when assessing business loan applications. The four Cs not only help the lender understand your business needs but can also help you when applying for finance.

1. Character

Although it’s called character, the first principle has nothing to do with personality. This refers to an applicant’s business acumen, reputation, credit history and track record to repay debt.

A lender will assess the background of the business owner/s and shareholders, and their experience. Also considered are the primary activities of the business and the environment they operate within, including time in industry, industry trends and business location.

A few other things that a lender may look at include:

• your personal and business credit history
• your tax returns and financial history
• whether you’ve paid off previous loans
• other factors such as job stability, previous businesses or any legal issues.

Tips:

• Check your credit profile; visit MoneySmart for more resources.
• Check your online reputation; does your website and social media account accurately reflect the business?

2. Capacity

Put simply, this determines if a business has the means to repay debt. The lender will assess the borrower’s ability to repay the debt by reviewing several items including previous bank statements, other loans and understanding the strategy of where you plan on taking your business, and if the business trade is seasonal.

If the business is already established, previous Profit and Loss Statements will be reviewed. A lender may also consider any trend in the current and previous financial year data. Many start-ups have a lot of expenses in the first year, so the second year of trade may show a better picture.

It’s in everyone’s interest to ensure the borrower can comfortably afford to repay the loan without incurring hardship, so providing as much information as possible helps.

Tips:

• Review and update your business plan (if you don’t already have one you can use our ANZ Business Plan Template).
• Ensure documentation is up to date. Use this handy business lending checklist.

3. Collateral

Collateral is an item or asset of value that is typically used to secure the loan, such as cash, property, land or accounts receivable.  The lender may take into consideration the age, location and attributes of the security. You may be required to provide details of the assets so the lender can determine its current and future value.

Collateral is not required for an unsecured loan but it may improve your chances of being approved or help reduce your interest rates.

Tips:

• Create a balance sheet to identify your current assets.
• Provide up-to-date valuations of your assets.

4. Capital

Lenders will look at the borrower’s overall financial position including:

• assets and liabilities
• net worth
• liquidity
• any deposit or borrower’s contribution they are willing to make

Capital is the additional security used if the borrower finds they are unable to repay the loan.

Capital includes assets such as cash, equipment, machinery and investments already made into the business.

The current value and potential future value of the capital will be considered should it need to be sold off in the event you are unable to repay the loan.

Tip:

• Complete a break-even calculation and cash flow forecast so you know how much extra you’ll need to sell to cover your repayments.

Speak to an ANZ Business Banker

When applying for a loan, it is important to be informed, prepared and in good shape to borrow. But another ace up your sleeve is a great relationship with an ANZ Business Banker.

ANZ offer a range of finance solutions that may suit a variety of needs, so as soon as you are thinking of borrowing, start a conversation early with us to see how we can help.