Financial Six C's
Glossary of Terms
Financial Six C’s
Character: the degree by which a borrower feels a moral obligation to pay his/her debts, measured by the credit and payment history.
Capacity to Pay: a subjective determination made by a lender based upon an analysis of the borrower’s financial statement and other information.
Capital: the amount of capital in a business is equal to the total of capital from debt and equity. Lenders prefer low debt-to-asset and debt-to-worth ratios and high current ratios. These indicate financial stability.
Collateral: an asset owned by the borrower, but promised to a lender against non-payment of the loan. The amount of collateral varies from lender to lender. The closer the collateral value is to the loan amount, the more comfortable the lender will be that the loan will be repaid.
Conditions: general economic, geographic and industry
Confidence: A successful borrower instills confidence in the lender by addressing all the lender’s concerns on the other five C’s. Their loan application sends the message that the company is professional, with an honest reputation, a good credit history, reasonable financial statements, good capitalization and adequate collateral.
Glossary of Terms
Angel Investor: Individual private investors who provide start-up funding for entrepreneurial companies.
Asset-Based Financing: Using the assets of a company (accounts receivable, inventory) as collateral for working capital loans.
Capital Expenditure: The outlay of money to accrue or improve capital assets (such as buildings and machinery) which are not bought or sold in the normal course of business.
Equity Financing: Raising money by selling interest in a business to a third party. The advantage: unlike a loan, equity financing does not have to be repaid. The disadvantage: the entrepreneur gives up part of the company and usually, part of the control.
Factoring: Selling the accounts receivable or invoices at a discount to the factor, who then advances the business approximately 70 to 80 percent of the face value. Once the invoice is paid, the business owner receives the balance of the invoice amount less the factor’s discount.
Lines of Credit: A pre-set credit limit, usually at a bank, that businesses can access as necessary to maintain positive cash flow. When funds become available, the borrowed amount is repaid.
Microloan: a loan guarantee by the U.S. Small Business Administration for up to $35,000.
Private Lender: An institution or individual who provides debt financing
Revolving Line of Credit: A fixed line of credit a business can draw upon as necessary. As the funds are used the available credit is decreased. As the loan is repaid, the line is replenished.
Short Term Financing: Loans typically repaid within three years. Types include: working capital loans, factoring, seasonal lines of credit, etc.
Venture Capital: Funds invested in private companies in return for equity in the form of preferred stock, a share in the profits, royalties or capital appreciation of common stock.
504 loans: The program uses Community Development Corporations (CDCs), which are nonprofit organizations that support local economic development. Each CDC has its own geographic territory. The program provides long-term, fixed-rate loans for major fixed assets such as land, structures, machinery, and equipment. Program loans cannot be used for working capital, inventory, repaying debt, or refinancing. A commercial lender provides up to 50% of the financing package, which is secured by a senior lien. The CDC’s loan of up to 40% is secured by a junior lien. The SBA backs the CDC with a guaranteed debenture. The small business must contribute at least 10% as equity.
7(a) Loans: The main SBA program is the 7(a) loan guarantee, which is named after the section of the Small Business Act that authorizes it. These are loans made by SBA partners (mostly banks, but also some other financial institutions) and partially guaranteed by the SBA. Despite the offer from the SBA to guarantee a loan, a lender does not have to make it. The SBA has created variations on the 7(a) program for special purposes. It has also created expedited processing with selected lending partners called preferred lenders.
8(a) program: The 8(a) program (named for the section of the Small Business Act from which it derives its authority) is for businesses owned by citizens who are socially and economically disadvantaged. A firm that is certified as an 8(a) is eligible for sole source and limited competition government contracts. Their 10% cost advantage price evaluation preference lapsed near the end of 2004. The SBA provides technical assistance and training to 8(a) firms. Firms graduate from the program after nine years. As of June 18, 2009, there were 9,383 firms in the 8(a) program.
CDCs: Community Development Corporations (CDCs) are nonprofit organizations that support local economic development and issue loans under the 504 program.
HUBZone: This program provides assistance to small businesses located in Historically Underutilized Business Zones (HUBZones) through limited competition contract competitions,
sole source awards, or price evaluation preferences in full and open competitions. The determination of whether or not an area is a HUBZone is based on criteria specified in SBA regulations. To be certified as a HUBZone small business, at least 35% of the small business’s employees must reside in the HUBZone.
Microloans: The Microloan Program provides very small loans to start-up, newly established, or growing small business concerns. Under this program, SBA makes funds available to nonprofit community based lenders (intermediaries) which, in turn, make loans to eligible borrowers in amounts up to a maximum of $35,000. The average loan size is about $13,000. Applications are submitted to the local intermediary and all credit decisions are made on the local level.
SBICs: Small Business Investment Companies (SBICs) are privately owned companies that are licensed by the SBA to provide debt and equity capital to small businesses. The SBIC sells a debenture to the SBA, which guarantees repayment and creates a pool of these debentures for resale on the secondary market. SBICs then take the proceeds and invest in small businesses or lend them money.
SBIR: SBIR awards are competitive grants to small businesses (500 or fewer employees) to research and develop new ideas for government agencies with the largest research budgets. The SBA coordinates and oversees the SBIR program but does not provide funding for the awards. Phase I grants allow a company to determine if an idea has scientific and technical merit and is feasible. Phase II evaluates the idea’s commercial potential. Phase III is private sector development of the idea. Phase I awards are for a maximum of $100,000 over six months, and Phase II awards are for a maximum of $750,000 over more than two years. Intellectual property rights are maintained by the small business for four years after the completion of Phase I, Phase II, or Phase III.
SBDCs: SBDCs provide free or low-cost assistance to small businesses using programs customized to local conditions. SBDCs support small business in marketing and business strategy, finance, technology transfer, government contracting, management, manufacturing, engineering, sales, accounting, exporting, and other topics. SBDCs are funded by grants from the SBA and matching funds. There are 63 SBDCs, with at least one in every state and territory, and they operate about 1,100 service centers.
SCORE: The Service Corps of Retired Executives (SCORE) uses over 11,000 volunteers to bring practical experience to start-up small businesses and to those thinking about starting a new small business.
Surety Bonds: A surety bond is a bond that a contractor purchases to guarantee that it will complete a contract. If the contractor fails to complete the contracted work, the surety bond is used to pay for completion. Small businesses often have difficulty obtaining surety bonds. The SBA will guarantee repayment of surety bonds through its surety bond program. First, the SBA guarantees bid bonds to ensure that if a bidder wins a procurement competition, the bidder will sign the contract. Second, it guarantees payment bonds that the contractor will pay suppliers and subcontractors. Third, it guarantees performance bonds that the contractor will complete the work as contracted. Fourth, it guarantees ancillary bonds that are required to guarantee the performance of the contract.
STTR: The STTR program is similar to the SBIR program, but it requires the small business to work with a nonprofit research institute. The SBA coordinates and oversees the STTR program but does not provide funding for the awards. Phase I awards are a maximum of $100,000 for one year. Phase II awards are for a maximum of $500,000 over two years. While there is no STTR funding for Phase III, the awarding agency may issue a sole source contract to a team that has successfully reached this stage.
WBCs: WBCs are similar to SBDCs, except they concentrate on assisting women entrepreneurs. There are WBCs in most states and territories.