“C” is for the 5C’s of Credit

Investorwords.com defines the 5C’s of Credit as:

The five key elements a borrower should have to obtain credit: character (integrity), capacity (sufficient cash flow to service the obligation), capital (net worth), collateral (assets to secure the debt), and conditions (of the borrower and the overall economy).

Makes sense, right? No one wants to lend money to a person (or business) lacking integrity, which can’t afford to pay back the loan, with no back up plan for paying it back or if economic conditions scream bad risk.

I talk to people all day – business owners trying to secure financing. Here are some of the things I hear:

• If I had money, I wouldn’t need a loan.
• My business is growing. Why can’t the bank see that?
• I know I have only been in business for X years.
• We have been profitable three of the last five years…just not two in a row.
• I used my savings and maxed out my credit cards. I am tapped out.
• I lost my house in foreclosure, my credit score is in the toilet.

In all of these, one or more of the 5C’s is affected and may cause the bank to deny a loan. Bankers will really try to get approval by repackaging the information for their underwriters and often the answer is still no.

What is a business owner to do? Factoring might be the answer!

In factoring, we look at things differently.

First, we are not lenders. We are purchasing an asset of the business. The asset is the invoice. Our avenue of repayment is your customer, or in factor-speak, the account debtor. We make our initial credit decision on the strength of the account debtor, not our client.

Second, we recognize that when you are trying to grow your business; cash flow challenges are par for the course. In most business, expenses are “front-end loaded” – the cost to complete the job happens before the invoice is generated. We also realize that to stay competitive, businesses have to offer credit terms. And then…THEN…we know that offering credit terms doesn’t mean the invoices pay within those terms.

Third, we fully understand the learning curves in business – some are straight up hill. Many business owners struggle to set up systems that accurately record revenue and expenses. The trap is the entrepreneurial belief that we can track everything in our head. It might work in the beginning – rarely as time goes on. When the time comes to work with the bank, many are overwhelmed getting the necessary information into a format the bank can use. In factoring, we are less concerned with the condition of the books and bottom line profitability. Instead we ask what the business could look like if invoices turned to dollars faster.

Fourth – we know that most business owners are over-extended, personally. In factoring, we are less concerned about personal credit challenges, provided we understand why the situation happened. If we understand why, we can often find ways to mitigate the risks we encounter.

And finally, and here I agree with the banks, it really does come down to character, integrity and patterns of behavior. Your company might not be profitable…yet. Your personal credit might be trashed…today. AND, you might have just gotten the opportunity of a life time to do business with or for someone that you have been working toward for years…

We signed a deal last summer, referred by a banker in BNI. This 4 year old company had steady, conservative growth and few growing pains. She was plodding along, making sound decisions when her phone rang…with the life-changing, business-changing opportunity. Overnight, she went from 4 to 22 employees, and no idea how to pay for it since this customer historically pays net-90. She couldn’t have planned for this and yet she couldn’t say no. We stepped in and purchased enough of her invoices to generate cash flow to meet payroll demands. She completed the contract on time and on budget. A new, larger contract starts with this customer next month.

The key? Sound decisions. She had a track record of good choices and her reputation was beyond reproach. Even completely stressed out and scared, it was clear that she operated her business and her life with integrity.


In business.

In relationships.

In factoring.