The Four C’s: Preparing to Apply for a Small Business Loan

Preparing to apply for a small business loan? As with many things, the key to getting approved for a small business loan involves laying a proper foundation. Lenders will want to look at four key factors as they relate to your business. We call these the four C’s: cash flow, credit, collateral, and character. You’ll want to ensure you have carefully considered and prepared for lenders to examine each of these before you apply for a loan. Let’s look at each one of these in more detail to see how they affect a small business loan application.

Cash Flow

Lenders will want to see that you have adequate cash flow coming in to support your business operations and repay the loan. In order to make a determination, lenders want to see financials, both for your business and for any shareholders or principals that have 10% or more ownership in the company. Why? Typically, anyone with more than 10% ownership in the company will need to personally guarantee the loan. Records lenders will want to see include business and personal tax returns for the last three years, current financials, including profit & loss (P&L) statements up to and including the most recently completed quarter.

It’s critical that you have processes and systems in place to accurately track and record your finances because these financials will be required when you apply for a small business loan. Unfortunately, many companies don’t take the time to keep their financial records updated, and this results in significant delays in the application process. So, when you’re preparing to apply for a small business loan, be sure to get—and keep—your financial records in proper order.


When preparing to apply for a small business loan, it’s important to consider that not only does cash flow matter, but credit matters as well. Lenders will look at the personal and company debt because these obligations heavily affect global cash flow. Why does personal debt matter? If a business does poorly, typically one or more business owners will need to personally infuse the company with cash, so lenders want to see that the owners’ personal debts aren’t already at or above capacity.

In addition to debt to income ratios, lenders will look at personal and business credit scores. They’ll also want to see that your debt-service coverage ratio (DSCR), which is an indicator of your ability to pay current debt obligations, is at a minimum of 1.25%.


Even if you have the first two C’s covered and your business is humming along, most lenders will want to see that some sort of collateral is available in order to approve a small business loan. Collateral is a form of security that’s used as a secondary form of assurance that a business can repay a loan. If a company becomes unable to pay a loan due to issues with cash flow, the lender will be able to recoup the outstanding balance by taking ownership of the collateral used to take out the loan. Company assets such as equipment, buildings, accounts receivable, and inventory may be considered as possible sources of repayment.

What about personal assets? In the event a business doesn’t have sufficient collateral to finance the loan, a lender may consider personal assets such as an owner-occupied residence or a vehicle. Remember that collateral will be seized in the event your business defaults on the loan, so consider the type of collateral you offer very carefully. Because collateral is often very important in securing a loan, it’s critical that you keep accurate records of your personal and company assets when you’re preparing to apply for a small business loan.


Unlike the first 3 C’s, the fourth aspect of your business that lenders consider when deciding whether to approve a small business loan is a bit more subjective. Lenders will look at the character of a business and of its principals. Some of the more concrete factors that lenders will look at include how long you’ve been in business and whether you pay vendors and suppliers on time. In addition to these numbers, they’ll also look at whether your company has a good reputation and whether you run a respectable business.

Not only will the character of your business be considered, but lenders will want to talk to the principal owners of your business and make a determination as to their characters. In fact, the Small Business Administration (SBA) requires that applicants demonstrate good character through the completion of a personal history statement. Have you been in trouble with the law or had previous bad debts? These are types of issues that may affect a small business loan. That said, an old arrest, conviction, or bankruptcy filing may not disqualify you. no matter what, you’ll need to come clean here, and ensure you offer up an accurate history.

“We present a lot of SBA lending opportunities to clients, but an SBA product is not always the right product. Small companies instinctively gravitate to the SBA because of their credentials, but it isn’t always the answer. Often, an SBA package is a good “layover” solution while a business scales, and that opens up other, more tailored approaches.”

Don’t Panic

If you’re preparing to apply for a small business loan and you’re not quite sure you completely meet all four C’s outlined above, relax. A lot of companies are referred to us because they are overleveraged in debt and most banks won’t consider lending to them. Even if your cash flow is solid, many banks still aren’t comfortable if debt is an issue. Perhaps your cash flow and credit are decent, but you have no collateral to offer up. Fortunately, we have access to programs that will work with companies like yours, and we can help you find solutions to many problems you might be having with any the four C’s listed above. Before you start worrying, give us a call! We’ll help you determine the best way to deal with your problem and get you the money you need to keep growing your business.

Get answers to your questions

We invite you to speak with one of our commercial or residential mortgage experts about your financial and lifestyle goals. This no-obligation consultation can be held over the phone or in our Warren, NJ, office.

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