Understanding banks is simple yet people continuously fight with some basic concepts. I have never, and I mean never, not known a bank to do everything within their power to help someone.
Here are the two “F Words” of banking: FDIC and the “Five C’s”
What is FDIC?
Federal Depositors Insurance Corporation (www.fdic.gov). Simply put, it is you and I as taxpayers that oversee and guarantee the backing of our federal banks.
This corporation monitors (or is supposed to) our banks to make sure they are not doing anything foolish that could cause situations such as the bail out. The FDIC in turn, creates the foundation for market and/or lending criteria that the banks adhere to. If they step outside of the FDIC regulations, it’s not pretty. The tighter the FDIC is on the banks then the tighter the lending criteria are on us as borrowers.
What affects this? The “Five C’s.” This begins with Conditions: Employment (or lack thereof). As do other large scale economic indicators drive this and then it trickles down to the application information of the borrower. When lending, the bank wants to ensure how they will get paid back. It’s not complicated. This is what the “Five C’s” are about.
The “Five C’s” are:
- Character: Credit, History, and Management (especially relevant experience in the market!)
- Cash Flow: Can you show that you can pay the loan back?
- Collateral: If paying the loan back fails are there adequate assets to be liquidated (Yes! Read that and weep!) to pay back the loan?
- Capitalization: Can the owner show enough liquid equity to balance out the equation?
- Conditions: Competition, market trends, and other factors that can sway this one way or another.
More often than not, people can’t understand why getting a retail operation financed is so tough. Think about it: What do you have left over if (worst case) it fails? Typically it’s racks of inventory that you couldn’t sell the first time around so, why is it going to sell now?
What if it’s a restaurant? What is left other than some food, chairs, and cooking equipment? Think along these lines when you are approaching a bank because they want to help you but it has to make sense if they are going to.
The reality is that our banks are a resource to be utilized and paid attention to. They see what the economy is doing and they are tremendous indicators of shaky ground. All in all, if your need passes musters with a bank then the odds are that it is pretty solid. Although, failed loans are not uncommon. Why?
Making a loan is a ‘snap shot’ in time. If things change once that snap shot is taken, then it’s anyone’s guess what the future will bring.
And if a bank says no please, call us: We’re here for you at: www.businessfundingnortheast.com.
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