How to Beat Wall Street and Bring the Bank to Main Street — The 5 Cs of Credit
Have you ever lost something you treasured simply because someone else had the money to take it from you?
Surrounding my family’s cabin in the mountains is a thousand-acre plot of land with several secluded lakes. As a kid, I enjoyed hiking to these lakes to skip rocks or catch salamanders. But, when a major corporation bought the property and put a fence up, I lost access to this personal haven.
Today, I have a recurring dream where I snip the barbwire fence and sneak to the lakes. The dream turns into a nightmare, however, when I find that the water has been drained in order to house a newly constructed Wal-mart surrounded by a metropolis of trains and high-rise apartment buildings. To this day I still wake from this nightmare in a panic.
The Small Business Nightmare
If you are a small business owner, you may have similarly encountered this nightmare in reality. You may have come face to face with the ominous presence of mega-corporations that threaten to shut down your small business.
Without jumping into the heat of the Wall Street vs. Main Street dilemma, I would simply like to address one fact we can all agree on: with so many large businesses dominating the market, small businesses across the United States struggle to receive the financial backing they need. Whether your business is just starting up or has been active for years, finding the business financing to start, keep afloat, or expand is difficult.
Banks simply aren’t lending like they used to.
Plus, with the cheap convenience of a Wal-mart, how can you convince lenders that your small Main Street business will be able to compete?
Banks are Still Lending
Despite the number of struggling businesses, many small business owners and entrepreneurs find the financing they need to succeed. Banks may have become more cautious over the last few years, but somewhere along the line, they have to give small business loans; that’s how they make money.
This blog post is the first of a two-part blog series that will discuss some solutions to the difficulties small businesses face. Using examples from the book “Money Money Everywhere but not a Drop for Main Street” by Bob Coleman, I hope to outline a few prerequisites to getting a small business loan.
Related Audio: ‘Come On, Open the Hose!’ — Interview with Bob Coleman
First off, in finding a loan it is important to know what banks look for. In his book, Bob Coleman emphasizes the importance of the traditional 5 Cs of credit: character, cash flow, capital, collateral, and conditions. People that receive loans are most likely to be strong in each of those categories.1. Character:
- You need to show banks two things about your character: 1) you are committed to your business’s success, and 2) you are going to do what it takes to pay off the loan, regardless of what happens to the business.
In addition to the business side of your character, lenders will want to know about your personal character. They’ll probably even Google your name, and as Coleman notes, “those spring break pictures of you in Cancun from college may evoke nice memories, but hardly reinforce your position as a borrower who wants access to someone else’s money.” Watch your online presence.
2. Cash flow: While character is important, it doesn’t pay off a loan -– cash flow does. Lenders want to make sure you earn more than enough money to make monthly payments. They will look at historical data as well as future projections, and they’ll want to know every major financial decision you’ve made or plan to make. Coleman suggests you not make the same decision Circuit City made when they “assumed that the customer would buy the same product from a $10/hr worker as they would a $20/hr worker.” What Circuit City thought would turn into cash flow, turned into bankruptcy.
3. Capital: Whatever assets you have that can be converted to cash will help you obtain a loan for your business. Bob Coleman defines capital as “all potential sources of cash: spousal income; liquidation of 401k plans; even potential inheritance and future pension payments.” However, this is not to say that your expensive cars, family cabin, and extra toys (if you have them) will serve as capital. On the contrary, the bank may see this as a sign that your extravagant lifestyle will not support a loan.
4. Collateral: The banks will want a guarantee that if you fail to meet their obligations, they have the right to seize your personal assets, future income, and even your spousal income to repay the debt. Everything you own or will own/earn essentially becomes collateral.
5. Conditions: You have no control over the economic conditions (and very little over the bank-imposed ones). However, the banks will want to know you understand your market and that your business will survive the economic recession. Do your research. Know your customers. Know your competitors.
Out of all the C’s of credit, Bob Coleman explains that, today, character and cash flow are the bank’s primary determining factors in providing business’s with loans. If the banker sees that your business is founded on good ideas, that you are dedicated to making it work, and that you are able to make sustainable profits, the banks will finance you.
What did I miss? What other advice do you have that can bring the Bank to Main Street?