The Five Cs

Defining and evaluating business lending

Five Cs of Lending

Credit Collateral Capacity Cash flow Character

Credit

money loaned the borrowing capacity of an individual or company

Evaluating Credit

depth of credit history amount of credit use number of inquiries current vs. previous credit issues

Evaluating Credit (cont.)

high balances outstanding level of unsecured debts slow vs. derogatory credit

Evaluating Credit (cont.)

explanation of derogatory/slow credit

judgments/liens public records

Collateral
acts as a guarantee or additional form of security; can be inventory, equipment, vehicles, or real estate assets that act as a secondary source of repayment in cases of default

Evaluating Collateral

financial information complete and consistent

knowledge of assets/liabilities willingness to pledge collateral unsecured requests

Evaluating Collateral (cont.)

value of assets available collateral/value existing liens on collateral

Capacity

the ability to repay debtpast, present, and future the timing of repayment and the probability of a successful repayment

Evaluating Capacity

excessive obligations or debt ratio slow vs. derogatory credit excessive credit inquiries stability joint vs. individual credit

Evaluating Capacity (cont.)

lack of:

business knowledge market analysis managerial experience support documents

Cash Flow

net cash as a result of sales revenue a measurement of cash into a

business as a result of sales

Evaluating Cash Flow

off balance sheet debts co-signer debt individual vs. joint debts account receivables/payables

Evaluating Cash Flow (cont.)

vendor payment schedule source of supplies and inventory use of loan proceeds

Character
Does the applicant show themselves to be trustworthy? What is the financial reputation of the applicant?

most subjective

Evaluating Character

consistent information ability to verify information applicants attitude urgency of request

Evaluating Character (cont.)

personal/business references Plan B forecast response to critique and/or request for additional
information

The Balancing Act

review credit early in process compare credit analysis willingness to correct past credit

calculate

higher LTV for collateral use of co

signers
or
guarantors

The Balancing Act

explanation of poor credit reduce request step loans alternative credit references technical assistance referrals

Lending- Glossary

Assets: items that have a cash value 9 Liabilities: debts owed to others 9 Cost: money, time or energy spent on anything 9 Liquidity: the ease with which an investment can be converted to cash 9 Overhead: the fixed costs associated with running a business
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Lending- Glossary

9 Revenue:

money earned by a business from sales of products or services 9 Co-signor: one who signs a note jointly with the borrower to guarantee a loan 9 Debt ratio: the ratio of ones debts to ones assets 9 Interest: the cost to use borrowed money 9 Principle: the actual amount of money borrowed from a lender

Lending- Glossary

9 Retail:

to buy from a wholesaler or manufacturer and sell directly to consumers 9 Wholesale: purchasing goods in bulk from a manufacturer and selling in smaller quantities to retailers 9 Lien: the legal right to hold a debtor property as security or payment for debt 9 Note: the legal document executed with the loan agreement

Lending-Glossary
Underwriting criteria: the policies and procedures of a lender that describe the process and/or analysis by which a loan is approved 9 Loan term: the period of time during which a loan is repaid
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