The Five C’s of Credit

Veillon Business Consulting, LLC would like to share with you the basics of commercial lending to help your new business get started, re-financed, or expanded. The first thing an experienced commercial banker and most finance providers will assess in your business loan request are the five C’s of credit.

These credit basics have not changed in over forty years and are:

  • character
  • capacity
  • capital
  • collateral and
  • conditions.

Now, let’s cover each in more detail:

Character – (integrity) has been defined as an intangible sum of personal attributes, and these attributes are revealed in many ways; through ones reputation, longtime residency, personal habits, and attitude toward obligations. A lender needs to know or feel if your character is ever tested, that you would repay the loan on a timely basis. Most of us would like to own an expensive car, but can your business pay for it?

It is a good idea to get your credit history before applying for a loan. You may be able to cure some mistakes that may have unintentionally appeared in your personal credit information.

Capacity – (sufficient cash flow) is a quality with diverse conditions. It simple means the ability to pay a specific amount of obligation when due, or a measure of the ability to pay. No matter what stage your business is in, a lender has to be comfortable with your business plan and projections of revenue which should provide sufficient cash flow to repay the loan.

Projecting financials for your business can be onerous, but the future of your business is counting on these numbers. Projections should always be accommodated by a strong narrative supporting your thought process in obtaining your financial projections.

Your numbers have to make good business sense in order to properly support the business operations on a day to day basis; CASH FLOW! Generally you need debt service coverage of 1.25:1; this ratio with some lenders is showing signs of increasing (due to present economic conditions) to 1.33:1. In addition, lenders would like your debt to income to be below 50%. Some lenders show exception, depends on the deal.

Capital – (net worth) is the financial strength of the risk that would be available in case of the inability or unwillingness of the individual to pay the obligations when due. It’s like a pillow to comfort your lender. Your net worth is the amount of assets that exceed your liabilities. This is not math, just arithmetic.

Capital is generally recognized as cash, paid-in-capital, or retained earnings. Your contribution is called “skin in the game”. Anything else is called “blue sky” and not credible to a lender. Remember, this is for a small business, not a Fortune 100 company.

Collateral – (assets to secure the debt) is a credit quality for a loan officer to take into consideration. A rate of depreciation on a product or service has to be considered in determining a payment schedule in order for the loan to pay-back properly to the lender. A good lender does not underwrite a loan based solely on collateral, but lack of collateral could be a problem. Your personal guaranty is required.

A Fortune 100 company does not usually need collateral, or personal guaranty’s, but yes size matters. Small businesses take it on the chin, but you have to start somewhere.

Conditions – (of the borrower and the overall economy) evaluation of various credit quality in terms of the prevailing economic environment. Wow, who, what was that?

A lender needs to feel good about your loan request; warm and fuzzy? In other words, can your business survive in a down economy, or is your business a good business in a bad industry? Are there legal issues? Lease or patent problems? Is it a growth company? Maybe you have special industry insights or leverage into a new niche. Veillon Business Consulting, LLC can eliminate some of the road blocks and put you further toward your business goals.

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