Need working capital for your business? First, make sure you're a creditworthy borrower.
Q: Since starting my small restaurant and catering business five years ago, I have managed to run on cash basis. I have avoided loans like the plague. However, I am currently having cash flow problems and might need to borrow some working capital.
I've always thought that banks are like people who lend an umbrella when the sun is shining and withdraw it when rain pours. I want to be wrong when I say that a bank's bottom line is the borrower's capacity to pay. But am I?
— WILMA, Lipa City
A: Let me put it this way. A bank, any bank, will want to lend to you if you are creditworthy, a good person or company to deal with, and if you offer good growth potential.
So from here, it is clear that capacity to repay a loan is an important criterion. But consider this: The capacity to repay a loan normally stems from one's ability to conduct a business efficiently and profitably. Thus, your skills and proficiency as well as reputation as owner-manager will count a lot in credit appraisal.
You must have heard about the 5 C's of credit — character, capacity, capital, collateral, and conditions. These are five key factors scrutinized by banks in making lending decisions to a particular loan applicant.
Character is of foremost importance and relates to a borrower's commitment to his personal and business obligations. Honesty, integrity, and commitment make a person a good credit risk.
Capacity relates to ability to repay a loan. And this is tied up to one's managerial and entrepreneurial abilities. Expect bank officers to ask you questions relating to the management and operations of the project for which a loan is being applied.
Capital refers to how much an entrepreneur owns, which is analyzed relative to how much he wants to borrow. This is obviously related to capacity to pay.
Collateral is, of course, security to the bank in case of loan defaults.
Conditions relate to the current economic and business climate affecting the economy in general. During periods of prosperity, creditors are more liberal in lending since businesses are presumed to be doing well, with plenty to spare to pay their obligations. On the other hand, economic depression makes creditors more cautious as more and more businesses are cash-strapped and become poor credit risks.
Source: UP ISSI
Q: Since starting my small restaurant and catering business five years ago, I have managed to run on cash basis. I have avoided loans like the plague. However, I am currently having cash flow problems and might need to borrow some working capital.
I've always thought that banks are like people who lend an umbrella when the sun is shining and withdraw it when rain pours. I want to be wrong when I say that a bank's bottom line is the borrower's capacity to pay. But am I?
— WILMA, Lipa City
A: Let me put it this way. A bank, any bank, will want to lend to you if you are creditworthy, a good person or company to deal with, and if you offer good growth potential.
So from here, it is clear that capacity to repay a loan is an important criterion. But consider this: The capacity to repay a loan normally stems from one's ability to conduct a business efficiently and profitably. Thus, your skills and proficiency as well as reputation as owner-manager will count a lot in credit appraisal.
You must have heard about the 5 C's of credit — character, capacity, capital, collateral, and conditions. These are five key factors scrutinized by banks in making lending decisions to a particular loan applicant.
Character is of foremost importance and relates to a borrower's commitment to his personal and business obligations. Honesty, integrity, and commitment make a person a good credit risk.
Capacity relates to ability to repay a loan. And this is tied up to one's managerial and entrepreneurial abilities. Expect bank officers to ask you questions relating to the management and operations of the project for which a loan is being applied.
Capital refers to how much an entrepreneur owns, which is analyzed relative to how much he wants to borrow. This is obviously related to capacity to pay.
Collateral is, of course, security to the bank in case of loan defaults.
Conditions relate to the current economic and business climate affecting the economy in general. During periods of prosperity, creditors are more liberal in lending since businesses are presumed to be doing well, with plenty to spare to pay their obligations. On the other hand, economic depression makes creditors more cautious as more and more businesses are cash-strapped and become poor credit risks.
Source: UP ISSI
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