Funding a Startup with Spotty Credit: Know the five 'C's before going for that loan.

• Author: Barbour, Tracy
• Position: FINANCE

Few endeavors are more exhilarating than launching a business--especially for entrepreneurs who have an impressive business concept and credit history.

For them, it may be relatively easy to secure a loan to finance a business venture. But that's not the case for individuals who don't have the best credit or business idea. Thankfully, there's a diversity of approaches budding business owners can take to overcome their shortcomings and get the funding they need.

Qualifying for a Loan

Having the aspiration to start a business is one thing, but qualifying for a loan to make it happen is another story. So it's essential for borrowers to understand the requirements they must meet to gain loan approval. Most banks, credit unions, and other lending institutions assess borrowers using what's known as the 5 "C"s of Credit. These areas--credit history, capacity, capital, collateral, and conditions--help lenders gauge the creditworthiness of loan applicants.

Wells Fargo, for example, closely scrutinizes borrowers' personal and business credit (if available) as well as their credit history with the bank itself, according to Andrew Foust, Wells Fargo's Alaska small business leader, who is based in the San Francisco Bay Area and covers Alaska. This information shows their track record for managing credit and making payments over time, indicating their credit risk. Capacity--the income amount, type, and stability--is also important because it indicates the loan applicant's ability to repay the loan. Collateral (if required) can be used to help repay the loan in case of default, and capital involves liquid reserves such as savings and investments that can help the business owner ride out setbacks. Conditions is a broad area where the lender considers the purpose of the loan and intended use of the funds. "That's all the other facts of that deal that impact the likelihood of repayment," Foust explains. "For example, in Alaska, one of the conditions we have to assess when doing commercial fishing vessel loans is the value of their fishing license and what their catch will be."

However. Foust says, managing risk in lending is dependent upon the unique aspect of each deal, so Wells Fargo uses a personalized approach to try to meet the financial needs of business owners. "Well Fargo wants to make every responsible loan that we possibly can to every credit-worthy business that is pursuing financing," he says.

First National Bank Alaska also strives to make good loans to as many businesses as possible, and its loan qualification process really depends on the financial strength of the business owner and other relevant factors. "Every loan will be different; it's not a cookie-cutter approach," says Sheila Lomboy, vice president of corporate lending at First National.

In general. First National reviews two to three years' worth of business and personal financial statements when evaluating loan requests. Existing enterprises that are seeking funds will likely need to also submit a detailed business plan. Business owners should also build a relationship with their banker. "As an owner, you know the ebb and flows of your business, and a banker wants to know all of those," Lomboy says. "Having that ongoing communication will help the banker understand that business and be able to provide the tools to...