the five c's of lending

8/4/2019 The Five C's of Lending

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The Five CsDefining and

evaluating businesslending


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Five Cs of LendingCreditCollateralCapacity

Cash flowCharacter


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Credit

money loanedthe borrowing capacity of an

individual or company


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Evaluating Credit

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

issues


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Evaluating Credit (cont.)high balances outstanding level of unsecured debtsslow vs. derogatory credit


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Evaluating Credit (cont.)explanation of derogatory/slow

credit

judgments/liens

public records


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Collateral

acts as a guarantee oradditional form of security; canbe inventory, equipment,

vehicles, or real estateassets that act as a secondary

source of repayment in cases of

default


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Evaluating Collateral

financial information complete andconsistent

knowledge of assets/liabilities willingness to pledge collateral unsecured requests


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Evaluating Collateral (cont.)value of assetsavailable collateral/valueexisting liens on collateral


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Capacity

the ability to repay debt-past, present, and future

the timing of repayment andthe probability of a successful

repayment


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Evaluating Capacity

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


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Evaluating Capacity (cont.) lack of:

business knowledgemarket analysismanagerial experiencesupport documents


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Cash Flow

net cash as a result ofsales revenue

a measurement of cash into a business as a result of sales


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Evaluating Cash Flow

off balance sheet debtsco-signer debt individual vs. joint debts

account receivables/payables


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Evaluating Cash Flow(cont.)

vendor payment schedulesource of supplies and inventoryuse of loan proceeds


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Character

Does the applicant showthemselves to be trustworthy?

What is the financialreputation of the applicant?

most subjective


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Evaluating Characterconsistent informationability to verify informationapplicants attitude

urgency of request


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Evaluating Character(cont.)

personal/business referencesPlan B forecastresponse to critique and/or

request for additional information


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The Balancing Act

review credit earlyin process

compare creditanalysis

willingness tocorrect past credit

calculate higherLTV for collateral

use of co-signers

or

guarantors


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The Balancing Act

explanation of poor creditreduce requeststep loans

alternative credit references

technical assistance referrals


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Lending- Glossary9Assets: items that have a cash value9Liabilities: debts owed to others9Cost: money, time or energy spent onanything9Liquidity: the ease with which an

investment can be converted to cash

9Overhead: the fixed costs associatedwith running a business


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Lending- Glossary9 Revenue: money earned by a business from

sales of products or services

9 Co-signor: one who signs a note jointly withthe borrower to guarantee a loan

9 Debt ratio: the ratio of ones debts to onesassets

9 Interest: the cost to use borrowed money9 Principle: the actual amount of money

borrowed from a lender


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Lending- Glossary9 Retail: to buy from a wholesaler or

manufacturer and sell directly to consumers

9 Wholesale: purchasing goods in bulk froma manufacturer and selling in smaller

quantities to retailers9 Lien: the legal right to hold a debtor

property as security or payment for debt

9 Note: the legal document executed withthe loan agreement


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Lending-Glossary

9Underwriting criteria: the policiesand procedures of a lender thatdescribe the process and/or analysis bywhich a loan is approved

9Loan term: the period of time duringwhich a loan is repaid

the five c's of lending

Documents