5 C’s of Lending

Many major players in the business world know that the very lifeblood of their firm is credit. When credit becomes capital, it is important to take the art of lending by heart, making sure that each loan request will be a success. Loans may be today’s necessary evil and it is crucial to put your banker’s hat on and know that in the world of borrowing for funds, it is necessary to learn the 5C’s of Lending.

If you have been running your business for years, you don’t have to worry very much about the art of requesting for loans. Start up businesses building their credibility, products, and services find it a challenge to secure a loan, where the lender will trust them a money or a property with an agreement that these will be repaid. The assets gained through these loans can also be forfeited if the borrower fails to pay on their agreed payment schedule. For this, stricter rules have been set and many lenders are using the 5C’s of Lending in order to qualify a borrower for a loan.

Why should you learn about these 5C’s of Lending

They are the most important C’s that can make a huge difference, marking the boundaries between the completion and failure of your business plans. You might never have heard of these five C’s of lending, but these will truly affect the grounds of having your credit or loan granted. Unless you can find angel investors out there who will fund your dreams, chances are, you are left with these five C’s to make sure lending will be a breeze.

What do these five C’s of lending stand for? These tools many lenders use are the five major components in making a positive decision on your loans, namely:

Character

As the word implies, this is where you will be evaluated depending on your financial performance and credit score. A good credit rating means you are trustworthy enough to pay your obligations on time. This will show how you handle your credits and your willingness to pay them. Your past credit history will be under close scrutiny and this is where the lender will rely on their gut-feelings, whether you will make a good borrower or not. Your work history will also be evaluated. It is best to be an expert and effective leader in the business whose loan you are applying for.

Capacity

You may call this as your cash-flow and your ability to pay your debt. This will be computed on the earning potentials of your business. For this, you need to make the best business plan to show since figures do really talk when it comes to borrowing finances. Can you afford the terms of the credit? Is the amount realistic to what your potential earnings will be? Start ups will have a hard time convincing lenders on their projected earnings, and there might be added requirements to fulfill for a loan to be granted.

Capital

This is what you have right now that has value. You can call them your assets, net worth, or equities. Lenders want to make sure that just in case you won’t meet your projected earnings, you have a soft cushion to rely on. With the uncertainty of today’s economic conditions, it is reality that businesses can rise and fall in a blink of an eye. Having enough capital will make it easier to cope with a sudden setback, specially when there is a need for emergency funds. Many businesses make a big mistake of having little capital that exposes them to higher risks of failure. Lenders will always consider a debt-to-worth ratio of 75 percent.

Collateral

This is a fail-safe measure that many lenders implement to give them the least risk in case you will fail to repay your loan. If your business fails, the lender will recover its loan by liquidating or selling your collateral and using the earnings to pay the credit off. Many lenders are wanting an equal collateral, or a 1:1 ratio in order for them to consider the security of your loan. There are limitations set by lenders to what collateral will have a greater value. These can include real estate, equipment, raw materials, finished products, and accounts receivables or the money owed to you by your customers.

Conditions

When lenders assess or review your request for a loan, there are many factors they will consider, like the current market conditions, the nature of your business, the demand for your products and services, inflation rates, interest rates, local and global economic conditions, labor conditions, current business trends related to your business, and current losses that the lender suffers due to credit issues. If the conditions are more favorable to your business, chances are, you’ll have your loan granted in time.

There is a wisdom when someone tells you to read the fine print – and make sure you read them carefully. Normally, a written agreement will be signed between a lender and a borrower, which can be used for or against you. These 5C’s of Lending can help you in crafting the best reason why the lenders will grant a loan to you in the first place. Being prepared with what the lender will expect from you can help you get more success, than another time wasted without a loan to pocket.

RESOURCES:

http://moneyandcredit.blogspot.com/2007/05/five-cs-in-lending.html

http://davidwimer.com/?p=235

http://www.vercoradvisor.com/articles/FinanceGame.html

http://www.roadahead.biz/application-documents/The-Five-Cs-of-Lending.pdf