Lending 101: The 5 C’s of Credit


Lending 101: The 5 C’s of Credit

In Real Estate, the three main factors for success are: Location, Location, Location.

In Marketing, it’s the standard four P’s: Product, Place, Price, and Promotion.

The 5 C’s of Credit may not be as well-known, but understanding what makes a “good loan” will improve the chances of getting your next loan approved. The 5 C’s are standard principals used by bankers, commercial lenders, credit analysts, and underwriters:

  1. Character: Show Integrity and honesty. Oftentimes bad things happen to good people - unpaid collections, foreclosures, bankruptcies, and late payments are all red flags. SOLUTION: Honor your obligations. Keep your credit score high, make your payments before the due date, and repair/clean-up any past problems.
  2. Capacity: The ability to repay debt. Banks are wary of borrowers who have high credit card balances or those spending more than they can afford. SOLUTION: Live within your means and don’t overextend your credit. Secure a long-term business loan, rather than a short-term, high fee loan that promises next-day advances at 8-20% interest rates. Refinance high-rate business loans and pay down, or better yet, pay off credit card debt and loans.
  3. Captial: Have a fallback in place. It’s challenging to lend to a borrower who has no way to make payments should they fall on hard times. SOLUTION: Be a SAVER… Have cash saved and tucked away for a rainy day. Show some liquidity – Savings accounts, IRAs, and continuing outside income are all considered a plus.
  4. Collateral: Often, borrowers think it’s enough to put down 10-25% toward their loan. However, this is equity, not collateral. Lenders often look to take a lien on all business assets, equipment, buildings, or homes. SOLUTION: Pledging an asset of value shows you are confident in both your business and your ability to repay the loan. Backing your business and loan with additional pledged assets strengthens your chances of obtaining financing.
  5. Condition: Lenders continually look at the full picture of the business. Show you’re invested and thinking ahead, be proactive and have a solid business plan! Are revenues increasing or decreasing? Is the business still current? SOLUTION: Stay healthy. Continually better the condition of your business. Know your competition, your short/long term plans, and your financial condition.

I highly recommend adding a sixth “C”: Conversation. It’s important to talk about your financing needs and keep communication active. Since every situation is unique, a good lender will take time to review the entire package and ask questions for feedback/explanations -- and will make sound decisions quickly.

Character + Capacity + Capital + Collateral + Condition + Conversation = CA-CHING! Loan Approved!

Topics: Loans

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