This refers to forms of security you can provide to your bank or other lender. COLLATERAL may be buildings or equipment owned by your small business or by you personally, including your home. Collateral may also include a guarantee by someone else that, in case you cannot repay the loan, the other party will. As money gets tight in the economy, there is an increased chance that banks will require loan guarantees in addition to collateral. You may know loan guarantees by the term “co-signer.”

CAPITAL, in this context, represents the owner’s investment in the business. Before applying for a bank loan, the owner has to have a significant investment in the business before a lender will even consider making a business loan. The loan officer will look carefully at the amount and quality of capital the owner has to offer.

CONDITIONS are two-fold. First, conditions refer to the overall economic climate and external environment surrounding the bank and the business firm. During a recession or periods of tight credit, it is obviously more difficult for a small business to repay a loan and more difficult for a bank to find the funds to loan. It becomes even more important for the small business to present an iron-clad loan application to the bank.

The second part of conditions refers to the intended purpose of the loan. Are you buying new equipment for expansion? Are you replenishing working capital to prepare for seasonal inventory buildup? Why do you need the money? Spell it out in detail in your loan application.

CHARACTER is often a subjective judgment made by the banker about the prospective client. The lender decides if the client is trustworthy with regard to repaying the loan and generating a return on the investment. This is where the education and experience of the client comes into the picture. The financial loan officer considers your references and background in your industry.

Character refers to the financial history of the borrower; that is, what kind of “financial citizen” is this person or business? Character is most often determined by looking at the credit history, particularly as it is stated in the credit score (FICO score). Factors that will affect your credit score include late payments, delinquent accounts, available credit, and total debt. Your credit score is an important number. It is how creditor and lenders quickly decide if you are creditworthy.