4. If You Need Money for Your Business You Need to Know _ _ _ 

Before you seek out financing it would be to your advantage to understand the Five "Cs’ of Financing." The Five Cs’ have been around for a long time, and they are the general criteria that lenders and investors look at when considering the potential funding of a project.

Character - This is evidence to the lender or investor that somehow you will repay your loans, and that you will keep your word even under the worst of conditions. Do you have good credit/character?

Cash Flow - This refers to the ability of the business to produce the sales, profit, and manage cash that is required to pay off any loans on time, and make a good return to the owner (s). To do this, you need evidence in your past financial records that show you can repay the debt, and/or that you have realistic projections indicating that you can service the debt. If you are seeking equity, will your projections leave enough to issue reasonable dividends to the shareholders.

Capital - A good way to understand capital is to look at the total amount of the project, and determine how much of the funding required will be in debt and how much will be in equity. If for example you need a total of $100,000 for the project and you have $25,000 (or 25%) to put into the project, then you would need to borrow $75,000 (75%). This example is a 75% to 25% ratio, and is also referred to as a $3 to $1 (3:1) debt to equity ratio.  A 3:1 debt ratio is somewhat common for a minimum standard. As the debt ratio increases the chance of being approved for a loan decreases. The solutions to a high debt ratio include the injection of more equity capital, having a co-signer and/or reduce the amount of debt.

Collateral - Collateral is what lenders expect to have title to, or a claim to in case your business goes belly-up (broke).  Land and buildings usually represent the best type of collateral and might require an appraisal to verify the value.  Loans on land and buildings usually range 75% to 80% of the value.  Equipment is the next level of collateral that a lender would consider as collateral, and then inventory.  The problem that lenders have with equipment, and especially inventory, is that it can mysteriously disappear over night (back to the character issue).  The condition of the equipment and the degree of specialization which makes the equipment difficult to sell in case of default also lowers the value to a lender.  So the amount of financing on inventory and equipment might only be 25% to 50% (or less).   Any collateral with a low loan-to-value ratio (LTV), or if the industry typically has a high failure rate, can cause the need of additional equity capital to be invested.  Some lenders specialize in providing funding for  Account Receivables (called Factoring), however only your best paying customer accounts will be considered as good collateral, and then the factoring company will only give you a portion of the total amount considered (this is called buying at a discount). Make sure that you understand all of the ramifications of getting capital through factoring.  There are other considerations that lenders require so you need to talk with them about collateral needs during your planning stage.

Conditions - This term refers to the conditions surrounding the nature of the funding. Conditions could include a wide range of considerations such as: International, National, State, or local economy (both current and 3-10 years projected into the future), the rate of growth of the market or area served, is the product or service a fad, where is the product or service at in it’s life cycle (is it new, growing, mature, or on the decline), does the business have an established reputation, is location an issue, is the weather or atmosphere an issue, is there an environmental concern, is there an adequate customer demand for this business to survive and grow, will future anticipated interest rates cause a problem (examine the loan amount, changes in interest rate, number of payments per year and the term of the loan in the number of months or years).  All of the above conditions, and more, could effect the possibility of getting financing.

So which one of the "5 C’s of Financing" is the most important? Well there isn’t one, because any one of the 5-C’s could cause the funding of a project to be denied!  However, many lenders and investors look first at the Character of the borrower and if it is questionable, further consideration of funding probably won't happen.

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