When you apply for a
merchant account from a bank, a local development corporation, or a
merchant account provider, your creditworthiness would be reviewed. A complete and thoroughly documented loan request, including a business plan will help the
merchant account provider to understand you and your business. The basic components of credit analysis are the Five C's
The Five C's of Credit Analysis:
- Capacity to repay is the most important of the five factors. The prospective merchant account provider will want to know exactly how you intend to repay the loan. The merchant account provider will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships, personal or commercial, is considered an indicator of future payment performance. Prospective merchant account provider also will want to know about your contingent sources of repayment.
- Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Prospective merchant account providers and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding.
- Collateral or guarantees are additional forms of security you can provide the merchant account provider. Giving a merchant account provider collateral means that you pledge an asset you own, such as your home, to the merchant account provider with the agreement that it will be the repayment source in case you can't repay the loan. A guarantee, on the other hand, is just that someone else signs a guarantee document promising to repay the loan if you can't. Some merchant account providers may require such a guarantee in addition to collateral as security for a loan.
- Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory. The merchant account provider also will consider the local economic climate and conditions both within your industry and in other industries that could affect your business.
- Character is the general impression you make on the potential merchant account provider or investor. The merchant account provider will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience levels of your employees also will be taken into consideration.
