- Understand the four Cs of credit, which banks and other lenders consider when assessing business loan applications.
- The four Cs are: character, capacity, collateral and capital.
- There are tools and templates available to help you.
It’s an exciting time in your business when you reach the point that you’re ready for more capital to help you to achieve your goals.
Whether you’re looking to invest in something like equipment or take advantage of a big opportunity that’s come up, you can save valuable time by being one step ahead and knowing what potential lenders will be looking for in your loan application.
Before you get into the details of comparing business loan options, start by understanding the fours Cs of credit, a common set of principles that banks and other lenders consider when assessing business loan applications.
For more information on the documentation you’ll need, download our Business lending checklist (PDF 1.1MB).
Ready for business lending? What are banks looking for? Paul Presland, General Manager ANZ Small Business, shares the 4 C's of credit.
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 of repaying debt.
A lender will assess the background of the business owner/s, 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.
- Check your credit profile — visit MoneySmart for more resources.
- Check your online reputation — does your website and social media account accurately reflect the business?
Put simply, capacity is about the ability of a business 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 financial information 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 interests to consider whether the borrower can repay the loan, so providing as much information as possible helps.
- Know your entity type and business structure. This will typically influence how your loan is structured and what security is required. Reach out to an accountant, lawyer or business advisor for more information.
- Review and update your business plan, if you don’t already have one you can use our ANZ Business plan template (PDF).
- Ensure documentation is up to date. Use this handy Business lending checklist (PDF 1.1MB).
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 the interest rate you are charged.
- Create a balance sheet (template xlsx 1.5MB) to identify your current assets.
- Provide up-to-date valuations of your assets.
Lenders will look at the borrower’s overall financial position including:
- assets and liabilities
- net worth
- any deposit or borrower’s contribution they are willing to make.
A lender looks at a borrower’s capital as part of checking what assets the borrower has available, if they’re needed to help make repayments on the loan.
These capital assets include things like cash, equipment, machinery and investments owned by the business. For example, if a business has a downturn in sales and cannot make repayments from its revenue during that period, it may be able to rely on cash reserves.
- Complete a break-even calculation (template xlsx) and cash flow forecast (template xlsx) so you get an idea of how much extra your business could need to make 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 offers a range of finance solutions that may suit a variety of needs, so as soon as you are thinking of borrowing.
Request a call back and start a conversation early with us to see how we can help.
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