The 5 C’s don’t have to feel like the 5 Oceans
Last month we talked about how to prepare to buy a business to set-yourself-up for success. This
month we will focus on what a lender looks for in a loan application.
It’s often called the 5 C’s of Credit;
If you are looking to buy a new business this is a super important category to focus on . . . it’s
effectively what you are buying. You need to know all the ratios that go along with the P&L &
Balance Sheet. What is the
• DTI (debt-to-income)? Are there any existing borrowings that you will inherit with the business?
• Recurring Debts (rent, insurance, salaries, supplies, existing borrowings, etc) & are they well
• ICR (Interest Cover Ratio) & can this be improved by either cutting costs without cutting volume
Here’s where you need to stump-up with skin-in-the-game! Investing your own money to back
yourself for success. This gives a lender a sense of comfort that you are serious about building
your business rather than a punter hoping to make a quick profit. Getting that number right is
critical . . . the balance between investing just the right amount to get a banker interested without
leaving yourself up the river without a paddle in an emergency.
Are you someone who a lender can rely on to pay the money back over time & on time?
As an ex-banker I often think that this is the most important but often forgotten measure for
lending. Knowing that you have the capacity to pay back your debt is one thing but a client who
can be relied upon to build & maintain a successful business whilst making their loan repayments
on schedule is gold for a bank.
You need to be sure that your credit history is “clean” & that you have a decent credit score. Credit
cards should be well used & paid down monthly when possible, transaction statements should
show a reasonable use of funds commensurate with your income. Gambling debts are not a good
look, nor are regular use of pay day lenders.
If you do have a history of default or have been a bankrupt, there are agencies that can help you to
recover your reputation & improve your credit score. If you’re looking to buy a new business, it’s
worth the time & investment to consult with one of these . . . who themselves have a good
With so many agencies & databases storing this data it can be difficult to recover from your sins of
the past. However, it’s not impossible & there are lenders who specialise in this space. It might be
a bit more expensive, but if you rebuild your history over time & show that you are able to manage
your money & repay your loans then the major lenders will start to approve your applications.
Bottom line, this is what a lender can flog to get their money back if you go bust. but the benefit is
not one sided. For you the borrower, it makes financing your business cheaper, usually a lot
Banks will often want a charge over your residential property, good old fashioned bricks & mortar,
that is relatively quick to liquidate & has an intrinsic value that can be measured on a regular basis.
However, not everyone wants to use their family home as collateral. So think about the other
assets a business holds that can be used as collateral; equipment & machinery is one, recurring
revenue & IP in a mature business are all alternative assets that a bank will look at as collateral.
Here’s where you need to work with a qualified finance broker to think smart & be smart about
what you’re requesting. Know what is the purpose of your loan, the conditions, the term. Going to
a bank & saying I need a million dollars to buy a business won’t wash. You need to do your
numbers, write your business plan, know what collateral you hold, how much you’re prepared to
put in yourself as capital & what the cashflow will look like.
Analyse the purpose of your debt & carve it up. The debt you need to purchase a business will
have different character traits to your cashflow or equipment financing.
Applying for a business loan might look complicated & for some even unachievable but at Clear
Options Finance we will guide you through the 5 C’s of Credit. We will review your financials &
work with you to put together a detailed debt structure & business case to be submitted to the
lender. We will write a credit story that will give the lender comfort that you have done your
homework, that you not only have the capacity but also the character that will suit their lending
Our objective is to find you the best lending conditions possible for your business & circumstances,
creating a strong relationship with your banker to support your thriving business over time.
We will demonstrate that you can & you will repay your loan.
To arrange a free 1 hour consultation with Clear Options Finance call 0478 732 343 or email