Traditional lenders evaluate loan requests on the basis of the client’s character, capital, collateral, capacity and conditions – the 5 C’s of credit.

The lender measures character by observing the client’s punctuality, organization and understanding of the size and purpose of the loan. They listen to what references say and what his credit history demonstrates about his commitment to pay off debts. They review the business plan to see how well it reflects the client’s experience, strategy and commitment.

Existing capital is a plus for an aspiring entrepreneur and a way for the lender to assess the borrower’s personal investment in the business.

Collateral is what a business pledges to secure a loan. These assets are a secondary source of repayment if the borrower defaults on the debt. Real estate, equipment, machinery, vehicles and certificates of deposit are good collateral.

Capacity measures the borrower’s ability to assume new debt. Lenders weigh how much credit the client can draw on, how much debt she has and how her debts compare with her income. They make cash flow predictions to assure the business will have cash to pay bills when they’re due.

Lenders want to know how the client’s business will weather economic conditions and what trends are driving its industry. They might be cautious underwriting a new video store, for example, if consumers increasingly prefer direct movie downloads.

Entrepreneurs approach banks, credit unions and alternative investors for startup capital.  And some entrepreneurs are using the internet to find backers for worthy causes or projects through crowdfunding. A credit union will typically lend to members only. Both banks and credit unions have strict requirements, and only a few lend money to startups.

Government-backed U.S. Small Business Administration (SBA) loans are funded by banks that participate in SBA lending programs.  The SBA provides a loan guarantee of up to 80 percent of the principal, and the interest rate – which  is determined by the participating lender – is typically in the range of prime rate plus 3 to 4 percent. The SBA funds startups, but the application process may not be ideal for entrepreneurs with a short timeline within which to fill their capital needs.

Alternative, nonprofit lenders like DreamSpring (formerly known as Accion), The Loan Fund, WESST, RCAC, Homewise, and LiftFund offer flexibility, mentorship, quick turnaround and a willingness to support new ventures that are unable to obtain a loan from a traditional bank. Loan terms are often tailored to the use of the loan and the business’s cash flow. While small and microloans may be offered, the maximum loan amount is often lower than with banks.

– most content contributed by DreamSpring