The 5 Cs of Credit: Capital

We have been discussing how lenders and the SBA use the Five Cs of Credit when assessing a 504 loan application: Character, Capacity, Capital, Conditions and Collateral. The quality of Capital refers to the amount of money personally invested by the owners and is an indication of how much owners have at risk should the business fail.

This investment refers to the assets of the business. Assets might include machinery and equipment, product inventory, and cash holdings. From a project financing perspective, capital is sometimes assessed as "equity," or the amount of assets compared to debt obligations. If your liabilities exceed your assets, it is considered negative equity.

Equity signifies a business's financial strength. It is used to assess credit risk and the ability to cover its obligations. The lender will consider any capital the borrower puts toward the business, because a large contribution by the borrower will be viewed as a greater commitment and will lessen the chance of defaulting on the loan. A direct financial investment by the borrower demonstrates a financial commitment to the project and shows lenders they are not taking all the financial risk, and lenders are always concerned with risk.

Lenders are more willing to lend to someone that has undertaken a personal financial risk, because they will make careful business decisions. This commitment is demonstrated through both personal and business financial statements.

Lenders look carefully at the amount and quality of capital the owner has to offer, because different industries demand different financial frameworks. Some industries need large investments in fixed assets, while others need large amounts of liquidity to meet operating expenses. Some industries have a minimum investment in machinery and rely on regular cash inflow to meet obligations.

Examining capital is important to lenders to assess risk as well as the health of your business and the borrower's commitment to loan repayment. Community Business Finance will help you gather the financial information needed for the 504 loan application.

We will be examining the other qualities of credit in the future. If your business is weak in one area, focus on your strengths in other areas. Community Business Finance will help you identify those strengths and provide you with a choice of commercial lenders.

Contact Community Business Finance and discover how our knowledge of SBA 504 loans can get your business the financing it needs.

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