With six weeks of 2015 behind us, it is clear that we are beginning to see some economic growth. Many economic measures are starting to reveal consistent growth. If this growth is sustainable, it is important to prepare for the liquidity requirements that will be necessary to support and grow your business. One of the key sources of liquidity is having access to bank credit. A working capital line of credit is an important tool to have available when the growth comes.
You can best prepare yourself by knowing how your bank will consider and evaluate your request for credit. Banks continue to measure your financial stability using the tried and true “three C’s” of credit: capacity, capital, and collateral.
Capacity represents your company’s ability to service the debt that you incur. This is measured by using debt service ratios that compare your cash flow to your debt service requirements. Your bank will need your financial statements, tax returns, and personal financial statements to fully analyze your capacity. It is important that they are up to date, accurate, and readily available.
Capital is the net worth of your company. It consists of your personal strength to support your obligations when the company’s financial performance is insufficient. It is your company’s ability to absorb difficult times.
Collateral represents the assets that you can pledge to support your debt obligations. With a working capital line of credit these assets are typically accounts receivable and inventory. These assets should exceed the amount of your loan. The bank will use these assets to repay your loan in the event you are unable to pay.
For Univest, a fourth “C” is also a critical component of the evaluation – character. How you have handled your business and your commitment to honor your obligations is an important component of the review. To prepare your business for the improving economy make sure all your “c’s” are in a row.
Univest Bank and Trust Co. is Member FDIC, Equal Opportunity and SBA Preferred Lender.