Editor’s note: This is the first in a series of three columns for small business owners.

For about five years until 2008, credit was relatively easy to come by. Companies were considered “bankable” much more often than they are today. It was an aberration in lending policies that helped fuel the credit crisis and now impacting the ability of small business to obtain credit.

As banks get back to the basics of lending, small business owners need to know how they should be prepared to approach them in this environment. How do bankers think?  Why do they lend money? 

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There’s been a saying that banks “only lend money when borrowers don’t need it.” This probably came from owners whose businesses weren’t profitable and hoped a bank would bail them out. But lenders need to see a demonstrated cash flow that can be expected to pay back a loan.

Banks will lend money for timing differences and capital expenses. Timing differences are not the same as a lack of profitability. Instead it’s a line of credit to pay the upfront costs of delivering a product or service until payment is received from the customer. Capital expenditures buy tangible items such as equipment and real estate.

This brings us to the “Five Cs of Credit.” They are the fundamentals small businesses owners need to know and understand so there are no secrets as to how a bank came to a decision to either approve or decline a loan application.

The “Five Cs of Credit” are:

• Character – Your credit rating. Do you consistently pay your bills in a timely manner?

• Capacity – Does your business have the cash flow to pay back the loan?

• Collateral – The assets to back-up the loan but know this is a bank’s fallback position for when a loan defaults.

• Capital – Your worth as a company showing a bank you personally have invested in your company and share the risk.

• Conditions – Current economic conditions, as a nation and specifically to your location and your industry. 

So, what do you, as a small business owner, do if you need to borrow money?

• Know your banker.

• Know what you need and how it will be used to better your company.

• Have a high-level business plan with financial statements for the last two to three years, forecasts for the next two to three years and information regarding competition and other relevant facts to support a loan request.

Also be prepared for an enhancement loan from the U.S. Small Business Administration (SBA). Contrary to popular belief that SBA loans are complex, paper-intensive and that they’ll want everything but your first-born child, things have changed. An SBA enhancement is an additional support to banks when something such as debt coverage is tight. An SBA enhancement can also put equity in your collateral to support a loan request.

The federal government’s 2009 stimulus package has some programs where guarantees back to a bank are higher, providing more protection for banks and increasing the possibility of obtaining a loan even in these tough times. More information about the benefits of the 2009 SBA Recovery Act are online at www.sba.gov/recovery/REC_LEARN_PROGRAMS.html . It’s also important to talk to a bank that is a preferred SBA lender.

Experts are available to help small business owners determine their need for credit, how to prepare a package for a bank, or to determine if, in fact, a business is “bankable.” These experts include consultants, Small Business Development Centers (Tucson’s is currently at Pima Community College but is in the process of looking for a new location), there’s one in Phoenix) and Microbusiness Advancement Center, 330 N. Commerce Park Loop.

Contact Ellen Kirton, president of Consultive Business Planning and president and chief financial officer of EffortlessHR, at ekirton@comcast.net or (520) 360-8359. Kirton has 35 years experience in banking, including as senior vice president at Chase Bank managing Small Business for much of Arizona. EffortlessHR’s website is  www.effortlesshr.com.

Contact John Loeken, a partner with B2B CFO, at jloeken@b2bcfo.com or (520) 388-0140. Loeken has more than 30 years of experience in finance including as a management consulting partner with IBM. B2B CFO is the nation’s largest CFO firm providing services to owners of emerging and mid-market companies with revenues up to $75 million.