Understanding
the Five C's of Commercial Lending
| By Gary Fisher • Banker & Commercial Lender | Please note that information in this article may be time sensitive and specific to the date it was originally published. Please contact the author for updates to this information. |
Borrowers often misunderstand commercial lending for small business, as they do not comprehend specifically what a lender requires to make a favorable decision. Many small business owners do not have sufficient experience with securing financing, hence a loan is often denied.
The lender will make every effort to provide the funding, as that’s how lenders make their profits. However, the borrower needs to be aware of how their loan is evaluated. Lenders all judge the worth of a loan based on what is referred to as the five C’s of credit. These are:
1. Character - The basis here is the borrower’s credit report and his or her payment trends.
2. Cash Flow - There needs to be adequate cash flow available to repay the loan and allow the borrower to pay for all other business expenses as well as their personal needs. This is true whether it’s for historical business experience or
projections for a business expansion or a startup.
3. Collateral - These are the assets that the borrower offers to the lender to secure a loan in the event it is not repaid. The primary collateral will be the business’ assets, but if these are not sufficient, personal assets may be required as additional security.
4. Capitalization - This consists of the business’ resources including fixed assets, retained earnings, and the owner’s equity. Funds borrowed from a source such as the seller of a business do not improve the equity position of a borrower.
5. Conditions - This refers to the outside factors that will be considered, such as competition and trends of similar businesses in the industry.
Finally, one important factor that many borrowers overlook is that their business experience must be in some way applicable to the business they seek funding for. As an example, many businesses such as motels or restaurants require experience in that field to convince the lender that they have the potential to be successful.
The key to securing the funds you need is to be fully aware of the factors on which you’ll be judged before completing the application.
Gary Fisher is Vice President
of Temucula Valley Bank.
He can be reached at 904-727-7535
or by Email at gfisher@temvalbank.com.
