What makes a business “creditworthy”?

Key takeaways:

• Your business’ creditworthiness helps determine whether your business will receive a loan and the amount.
• By understanding what goes into determining your business’ creditworthiness, you can be better prepared when requesting a loan.
• There are five Cs that can help you better understand your business’ creditworthiness.

Is your business creditworthy? If you’re wondering what that means, allow us to help.

Creditworthiness is based on evaluating the financial stability of an organization and its owners. It’s a factor that helps banks decide if a business would be able to repay a loan and meet financial obligations.

In other words, the more creditworthiness your business has, the more likely it is you’ll receive a loan.

So how do you find if your business is creditworthy? Use the 5 Cs of credit:

Character

A bank wants to know you’re responsible and will run your business in a trustworthy, credible manner. Your previous work experience, industry knowledge, personal credit history, credentials in running a business and general reputation play a part in determining your character.

This is why it’s so important to build a relationship with your banker. By building a relationship on trust, you can give your banker a clearer picture of your business and its needs. From there, your banker can help determine what may help your business move forward.

Capacity/Cash flow

You’re not going to be able to pay off a loan if your business isn’t making any money. The bank needs to know how your business is going to generate enough cash flow to do that and meet any financial benchmarks. To determine this, generally the bank will look at your income, expenses, debts, borrowing and repayment history.

Capital

How much money is invested in your business? If you’ve invested some of your own money in your business, it shows you’re personally invested in its success. Keep records to show your personal investment in your business and show records of others’ faith in your business with their monetary investments.

Conditions

Is your business growing? What is the state of the economy as a whole and your business’ industry? The bank wants to see favorable conditions that show a positive outlook for your business. To identify the conditions that surround your business and any potential risks, the bank will review the competitive landscape, your relationships with suppliers and customers, and industry-specific issues.

Collateral

Lastly, you need a backup source of assets that help “guarantee” the loan. If your business doesn’t generate the cash flow needed to repay the loan, collateral would be used as a secondary source of repayment. The assets can be commercial real estate, equipment and inventory.

There are no standard rules as to how banks weigh these attributes, but they’re still a good way for you to evaluate your business’ creditworthiness. If you have more questions about your business’ creditworthiness, visit your local MidWestOne branch.

MidWestOne Bank does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.