Power User Spotlight: A Behind the Scenes Look into Lending
by JimD, Former Moderator
- Created: January 14, 2011, 10:04 am
- Updated: May 27, 2011, 1:22 pm
Many small business owners will try to apply for lending at some point while operating their business. Mark French and his company Crest Capital have been in the lending business since 1989 and help small businesses with equipment leases and loans as well as software financing.
Business.gov interviewed Mark, also known as CrestCapital in the Community, for some insight into lending to small businesses.
What financial information do you look at when qualifying a small business?
There are two main ratios that we look at when trying to decide if the financial stability of a business, the current ratio and the debt ratio. Many small business owners may feel that this is too much finance and accounting for them, but it is necessary for small business owners to take some time and learn these types of ratios.
The current ratio is the current assets divided by the current liability. If that number is above 1, your business is considered healthy. If it is below one, a lender may see your business as having difficulty meeting current obligations and may not want to lend you.
The second ratio, debt ratio, is the opposite, the lower the number the better. Debt ratio is your total debt divided by your total assets. This ratio tells us a lot about the staying power and the past decisions of the business. If the ratio is higher, there is more risk involved.
How can you improve your finances to attract lenders?
Retain more earning. If you retire more cash from operation, your cash level is high and it will improve both your current ratio and debt ratio. Personal and business expenses can become blurred for many small business owners, but successful ones can balance this. Having more cash on hand tells us that you are able to save your money and it gives you some slack if you lose a big customer or the economy makes a turn for the worse.
What non-financial information do you take into consideration?
The non-financial aspects can also play a big part in whether we do business. We and most other lenders break it down into the Five ;s.
- Character - Character is somewhat subjective, but we do look at specific factors. We look at the busines-s lending history. Have all loans been paid back on time? How well are the financials balanced? These factors give us a lot of insight into how the business will handle our loan.
- Credit - Credit and character can be broken down into two sub-categories. This would be for business less than 5 years old and those older. This is because 80% of small businesses fail within the first 5 years. This statistic makes it very hard to want to lend. For younger businesses, we will look at the principa-s personal credit history. This is because there is no historical data for the business.
- Cash Flow - Most small business owners understand cash flow. We want to make sure there is money coming in and that the company has enough money to have the cash to pay back the loan. If a payment is due, we want the payment now and not when your customer pays you.
- Capacity - This is similar to depth of a football. If something goes wrong, can your business recover? This refers to if you lose a client, lose a major employee, or the economy takes a turn for the worse. We want to make sure we can get our money back.
- Collateral - Most people understand this because it is always been used with lending. We will look at what type of collateral you have to offer just in case things do not go according to plan.
Does your personal credit affect your business credit?
Potential borrowers ask of this all the time. The way you handle your personal finances is usually a good indicator of how you do it with your business. Many businesses do not have the historical data to reliable sorely on business credit history. If you have bad personal credit, try to get that corrected. It will take time, so the faster you can get on track the faster it will become better.
What surprises you the most?
People always think that bankruptcy is an option and that it truly vanquishes your debt. However, the lenders are still stuck with the bill. It is a chain reaction where a lot of people will lose money and have to recover from it. We are a small business as well and that is why we take so much time in qualifying potential borrowers. If someone defaults on a $100,000 loan, it will take a lot of other customers to recover from that.
Date Registered: August 9, 2009
Total Messages Posted: 27
Total Kudos Received: 49
As of 1/14/2011
Except when specifically noted, any views or opinions expressed on the Business.gov Community forums, blogs or member-contributed resources are those of the individual contributors. The views and posted comments do not necessarily reflect those of the Business Gateway Program Office, the U.S. Small Business Administration, partner agencies, or the Federal government. Information on the Business.gov Community site is provided as a service to the Internet community, and does not constitute legal advice. Business.gov aims to provide quality and accurate information, but we make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in or linked to by Business.gov. Since laws and regulations change frequently, nothing provided herein should be used as a substitute for the advice of an attorney.
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