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BANKER INSIGHTS FOR YOUR BUSINESS | Citywide Banks
THE FIVE C'S OF CREDIT
Understanding a Bank's Business Loan Decision
There are many factors a bank takes into account when considering your business loan request. It’s important to remember that your commercial loan officer is tasked with finding ways to make your loan a reality. A responsible lender, like Citywide Banks, will base decisions on both tangible and intangible criteria. While each lending situation is unique, most banks utilize some variation of a basis known as the ‘Five C’s of Credit.’ Understanding the Five C’s can help your business better prepare for your loan request and the related discussions with your loan officer.
CHARACTER:
The lender will need to gain insight into the borrower’s trustworthiness and integrity by evaluating the following:
- Borrower’s overall honesty, integrity, nature, and abilities; including the business, its owners, management & culture
- Borrower’s abilities, educational background, and experience in industry
- Quality of borrower’s references
CASH FLOW (a.k.a. CAPACITY):
The bank will evaluate your business’s plan to repay the loan, which will include review of the following:
- Cash flow available to service debt (EBITDA)
- Debt Coverage Ratio (the bank’s source of repayment)
- Your company’s borrowing history and track record of repayment
COLLATERAL:
As a contingent source of repayment, the lender will review tangible and intangible assets that can be used as the bank’s security for the loan. The bank will also take into account any discounting rules, legal issues, etc. associated with the collateral.
CAPITAL:
The bank will want to fully understand the capitalization and investment history of your company. It will run several financial analyses, including:
- ‘Net book value’ vs. ‘appraised value of assets’
- ‘Tangible vs. intangible assets’
- Personal net worth of owners
CONDITIONS:
The lender will examine how your company is impacted by marketplace risk factors, including:
- macroeconomic, political, and regulatory threats or opportunities
- Industry or client specific issues
- Vendor and customer relations
- Banking relationships
-- Ron Hoskins, Senior Vice President, Citywide Banks |
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