If you’re a small business owner applying for a loan or other credit, it pays to understand what lenders are looking for. From the point of view of the small entrepreneur the decisions that banks and other credit institutions make can often seem random. In fact, they are anything but.

It’s crucial to understand that lenders are not necessarily risk-averse. Providing credit has a built-in element of risk. By offering you credit they are, in effect, making a bet on the success of your business. Like all professional gamblers, lenders like to get as much information about their bets as they can, in order to manage and limit risk.

So when they assess your business’s suitability for a loan, they will look at the so-called “three C’s”: credit history, collateral and character.

Credit History

Everyone is familiar with the idea of having their credit history examined when they apply for a loan. Every adult has a credit history and a credit rating based on that history. This information is shared among major lenders.

Clearly companies, like people, also have credit histories. The ratings based on these are sometimes called institutional credit ratings. When you request business credit the prospective lender will check your company’s institutional rating. There are also circumstances in which lenders may wish to check the personal credit ratings of the business owner and directors - this is common for small businesses, startups, and businesses that have recently changed hands.

Collateral

Remember that lenders are gamblers - but they like to hedge their bets as much as possible. One way they will do this is by seeking collateral on any credit they extend to your company. In the same way that it’s easier to get personal credit if you are a homeowner, you’ll find it easier to get business credit if your company has assets that can be realized for cash in the event of your defaulting on repayment. As with personal loans, collateral on business credit most often takes the form of the company’s real estate - lenders prefer collateral that appreciates in value, such as land or buildings - to depreciating collateral like company cars, or to potentially unstable collateral like investment portfolios.

It’s worth remembering that personal property can be used as collateral for business credit. This often happens when businesses are starting up; the directors may raise money against their own property to finance the launch. Raising business credit against personal property is a standard mode of operation for many sole proprietors.

Character

Of the three C’s, character is the hardest to define. It is, however, a very important concept for business borrowers. When assessing private individuals for credit,

It’s much easier for lenders to get a sense of a business’s character. A company is a public organization and its actions a matter of public record. Corporate character, however, is about far more than your business’s reputation or past performance. It encompasses your brand, planning and preparations for the future. Character is also defined by your personality and those of the people who work for you.

Of the three C’s, character is the toughest for a potential lender to assess. A bank can check out your credit rating and the value of your collateral. But issues of character require the lender’s final decision maker to make a careful judgment about you.

What can you do to make sure this judgment goes the right way? The key thing is to put the decision maker’s mind at rest by showing him you’ve done everything possible to guarantee the success of your venture. Have a detailed, concrete business and a development plan, and show him that you’ve researched your market - let these materials speak for themselves. Be responsive and efficient in your dealings with the lender.

If you can satisfy all of the three C’s, you should have few problems obtaining reasonable business credit. Remember that if a lender turns you down, there will be a good reason for the negative decision. If that reason doesn’t seem to lie with your credit rating or the quality of your collateral, there’s a character problem: the lender doesn’t trust your product, your market, or your ability.

Don’t get angry if you are refused credit for reasons of character - your personal character isn’t being attacked. Treat an initial refusal as sound business advice. The lender has taken a long, hard look at your operation and your plans and something has been found lacking. Talk to the lender to find out what improvements can be made to secure the necessary credit. Make these changes and your business will be stronger as a result.

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