The 5 C’s of Credit
The Story of Your Business
The 5 C’s of Credit will help you to tell the lender why they should INVEST in you? Tell the story and you won’t have to SELL the story. Lenders want to lend money, but they are charged with being good stewards of the money. That means bankers are taking calculated risks. Write the story (TRUE STORY) of why you are a good investment using the 5 C’s of Credit and you’re a dead ringer for getting what you want.
It just make it easier for them to give you the money.
Using the 5 C’s of Credit won’t guarantee that you’ll get funded, but it will show whether you are a good investment. If when you are finished writing your own 5 C’s you find that you are not a good investment begin your work on improving the areas that need help. Then go apply. As always, talk with your banker. They are there to help you through the process.
Character is the heart of the story. This is the “why” you should get the loan on a people skills level. This is somewhat subjective and looks a little like this.
Character Example: Jason has been working in heating and air repair and maintenance for 11 years and had a strong supplier network built for receiving supplies fast. His knowledge is rarely surpassed and the customer base he’s built is loyal. He has good reason to set out on his own.
Capital is the what can does the borrower have that will back up the loan if they default. NOT COLLATERAL. Collateral is the security of the loan. Capital can refer to down payment, equity in the property, or over all net worth.
Capital Example: Dr. Jones is a good capital risk because his net worth is $3MM non-real estate and we are only loaning him 40% of the what the property is worth
Capacity is the ability to repay the loan concerning cash-flow. What debts are out there and how much money does the company have coming in to support the loan and it’s terms.
Capacity Example: Phillip has been running his business out of his garage for 12-15 months and saving every dime he has possible without taking on any long-term debt except his work truck. He has a monthly payment of $350 and enough cash in reserves to support the business operations, the loan payment, and his work truck payment for 18 months before running out of cash if none at all was generated. For the last 12-15 months he’s generated 5 times revenue over debts. There is good reason to believe this trend is here to stay.
Collateral is simply what you pledge in lue of the money. Or better put: Collateral is what they will come and get (for a fee) if you default on the loan.
Collateral Example: You put up your work truck, inventory, office furniture, etc for a $15M loan.
Conditions refer to what special circumstances make THIS particular venture the right one to INVEST in right now. What considerations should the lender take into account before extending a loan? These can include market conditions, personal experience, etc.
Conditions Example: Eileen has been working as a seemstress for 30 years and loves embroidery. Her husband is a business man and has many contacts. For years people have commented on the intricate embroidery on the cuffs of his dress shirts. This is Elieen’s handy work. There is a strong referral base set up and with the marketplace for business jobs thinning out due to the economy, Eileen has positioned her “low-cost extras” as a competitive advantage for out-of-work business men to have that added edge that gets them remembered.
In addition to that, she has recently retired and has 30 – 40 hours per week to devote to the business.
The Story of Your Business
If you are a lender just starting out and you haven’t used this before, I implore you. Knock your underwriter’s socks off. Do this and watch the nature of your business change. From the initial interview with your client to the closing to the follow up as the loan is being paid off.