CHAPTER 6 The Three C’s of Funding

Three C’s. If you are considering getting funding, you need to know where you stand in terms of the three C’s. It is what almost every lender, and funder, wants to see. The first C is credit, and it is an important part of how the lender will determine their risk in funding you. Many people look at credit as this ambiguous number that helps or hurts them with opportunity without understanding how a funder looks at your credit to determine their risk. I am a big fan of understanding things from different points of view in order to correctly respond in a way that will be most optimal for oneself. If you did not repay the last several organizations that extended you credit, then that tells me as a lender what type of risk there will be associated with lending to you.

The second C is cash flow. The second C is really important for the organization to determine whether or not you could afford the amount you are asking for. The first C as credit helps them make a judgement on whether or not you are willing to repay debt. The second C tells them if you are able to pay the debt. There are several documents that lenders and funders look at to determine your cash flow. The first document is one of the more controversial documents that has a love-hate relationship with many entrepreneurs. That is their business and personal taxes. The reason that this is so controversial is because almost every business tries to show they made less to lessen their tax burden. But when you need funding, lenders have to look at your taxes to determine your cash flow. They have to assume that many if not all those write-offs are justifiable and would still be needed. Profit and loss statements and balance sheets are the other documents that lenders use to see what the cash flow looks like.

The third and final C is collateral. Collateral is important because it says that the funder is not the only one taking the risk. When someone has collateral that they are putting into the loan, it tells the funder, “Not only am I telling you to take a risk on my business by lending me this amount but also I have something of value that I will use to demonstrate that I am committed to this value.” There is a plethora of different collaterals that are looked at. I want to start with what is usually not considered. Many funders do not consider intellectual property. There could be many reasons why, but my opinion is that one would need to be a subject-matter expert in the area where the intellectual property is involved to determine the possible value of an intellectual property. I would like to address the only nonphysical asset that I have noticed many funders use as collateral: invoices. Many people consider collateral to only be real estate or equipment (which are the primary ones that is considered); however, invoices are often considered to provide factoring for some of the services that has been completed but not paid yet. On the accounting document that helps funders determine and be able to look at this, it is a document called the account receivable aging report, often referred to as AR report. This report details unpaid customer invoices.

Financial institutions are involved in the business of lending money to people with an aim of making profits from the charged interest. This is a risky business and the business has to do all that is possible to protect itself. To do this, financial institutions device strategies to use when lending to other businesses and individuals. These strategies are the three C’s of funding, which include cash flow, character, and collateral.