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Regardless of where you seek funding - from a bank, a local development corporation or a relative - a prospective lender will review your creditworthiness.  A complete and thoroughly documented loan request (including a business plan) will help the lender understand you and your business.  The basic components of credit analysis - the "Five C's" - are described below to help you understand what the lender will look for.

Navigating the High C's of Credit

Capacity to repay is the most critical of the five factors.  The prospective lender will want to know exactly how you intend to repay the loan.  The lender will consider the cash flow from the business, the timing of the repayment and the probability of successful repayment of the loan.  Payment history on existing credit relationships - personal or commercial - is considered an indicator of future payment performance.  Prospective lenders also will want to know about your contingent reserve sources of repayment.

Collateral or guarantees are additional forms of security you can provide the lender.  Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can't repay the loan.  A guarantee, on the other hand, is just that - someone else signs a guarantee document promising to repay the loan if you can't.  Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the loan.  Will the money be used for working capital, additional equipment or inventory?  The lender also will consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

Character is the general impression you make on the potential lender or investor.  The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company.  Your educational background and experience in business and in your industry will be reviewed.  The quality of your references and the background and experience levels of your employees also will be taken into consideration.

For many start-ups, cooperation among lenders is the key.  Many new businesses need to piece together a patchwork to satisfy their financing.  Banks, alternative lenders, government programs, family and friends often become partners to assist in the development of the business.  If you encounter resistance in obtaining financing, get creative.

What if you don't quality for traditional financing through a bank?  There are several "alternative lenders" listed in the financing directory section of this Guide.  These lenders often have more flexibility than banks.  Once your business is established and proven, a banking institution will be more likely to favorably consider future requests.  In general, banks have stricter guidelines on risk than alternative lenders.  However, banks are better suited to grow along with your business, and their many valuable services and products could ultimately present your venture with more choice and greater flexibility.

Financing your start-up or expansion should be considered as you begin your planning.  It makes no sense to think of planning and financing separately.  Financing can take an unexpected amount of time, so identifying key issues both dependent and independent of your plan is wise.  Meet with one of the organizations listed in the Start Up section and have a conversation.

Advice
 

Before you bring your financing request to a lender, obtain your credit report.  The State of Vermont requires credit reporting agencies to give one free report per year to anyone requesting it.  Lenders will be looking at this info, so you should be aware of its content before they scrutinize it. Call Credit Bureau Service of Vermont (800) 888.4213 to find out how to get yours.

Put yourself in the lender's shoes: 
If someone was looking to borrow money from you, what would you want to know before you lent your money?