Ask SCORE: A new approach to getting the credit you need

A new approach to getting the credit you need
Whether for a business startup or a going concern
By Richard Walton, Assistant District Director for SCORE
Contributing Writer

In my work with entrepreneurs who are trying to start businesses as well as those firms already in business, I often encounter the fundamental question of entrepreneurial finance, which is: Where can I get the money? While this is the objective of contacts with banks and other sources of funding, it should not be the starting point of discussions. The reason is that banks and other lenders have a fundamental question of their own which controls their approach to loan requests. That question is: Will I get repaid?
Entrepreneurs and business managers will have an easier time obtaining funds if they approach a lender from the perspective of paying back the loan, simultaneous with the loan request itself. The two are inseparable in the mind of the lender and should also be in the mind of the borrower. In this short article, we will look at ways in which entrepreneurs and managers can provide a viable answer to the question of repayment. In order to do this, we will use a credit assessment system known as the four C's. The four Cs are character, capacity, capital, and conditions. (Note: This list may be amended by adding collateral, conditions, and computer, however we will use the basic 4 Cs)
Character: Character is the personal dimension of finance. For the start up such things as credit history, previous work history, home ownership, education and community involvement among other activities can demonstrate it. For the already going business, measures may be company reputation in the community, previous legal actions either by or against the firm, and credit history. In sum, the character of the individual and/or the company should be such that the lender can have reasonable assurance of dealing with an individual or company that is reliable as well as ethical. Character goes a long way toward providing assurance that the borrower will repay the loan.
Capacity. For the individual as well as the existing business, a Business Plan coupled with a track record of previous performance demonstrates capacity. A business may demonstrate capacity by reference to its financial history (Balance Sheet and Profit and Loss Statements as well as cash flow projections). An individual may point to previous accomplishments in business as well as education and/or sports. The key determinant is the ability to generate sufficient cash flow to repay loans as well as carry on the business. (Note: In the case of the entrepreneur starting a business, the ability to carry out the tasks involved with the Business Plan and to realistically anticipate the projected results are crucial).
Capital: Capital is the amount of resources that the entrepreneur can obtain for the business, or that already exist in the going concern. A key factor here is that the entrepreneur should be able and willing to commit financial assets to the start up firm, or that the going concern have sufficient reserves to operate the business as well as repay the loan. The ability to commit capital to a new business venture is demonstrated by a personal financial statement in the case of the entrepreneur and the Balance Sheet/ P&L for the going business. For the startup firm, it is especially important for the entrepreneur to demonstrate his or her faith in the venture by being willing and able to place their own financial assets at risk.
Conditions. Economic conditions are a major factor in today's economy. Here the firm's ability to generate sales, the competition, and that state of the local economy would be important factors to consider as well as the financial history of the firm. For the entrepreneur, the Business Plan is especially important, and the financial data must be viewed not only from whole system view (this is known as top down analysis) but also from the bottom up, meaning the individual products and services that make up the firm's ability to generate sales and profits. Here, too, competition will be a major factor in the firm's ability to function effectively in meeting its goals and objectives.
Summary: Using the four Cs, entrepreneurs and business managers alike can approach their financial needs from two perspectives simultaneously by focusing on their credit needs and their ability to repay the loans that they receive. This process can tilt the scales substantially in their factor.

Mr. Walton teaches Financial Management, Operations Management, Corporation Finance, and Entrepreneurial Finance at Frostburg State University. He is also Assistant District Director for SCORE, Western Maryland, and the President of ERMACORP, a Hagerstown based Management Consulting Firm. He may be reached at 301-462-9850, or by email to