The
5 C's of Commercial Business Mortgage
Credit
Commercial loan lenders are in business to make money. Consequently, when a commercial loan lender lends money it wants to ensure that it will be paid back. The commercial loan lender must consider the 5 "C's" of Credit each time it makes a loan.
Capacity to repay is the most critical of the
five factors. The prospective lender
will want to know exactly how you
intend to repay the loan. The lender
will consider the cash flow from the
business, the timing of the repayment,
and the probability of successful
repayment of the loan. Payment history
on existing credit relationships -
personal and commercial - is considered
an indicator of future payment performance.
Prospective lenders also will want
to know about your contingent sources
of repayment.
Capital is the money you personally have invested
in the business and is an indication
of how much you will lose should the
business fail. Prospective lenders
and investors will expect you to contribute
your own assets and to undertake personal
financial risk to establish the business
before asking them to commit any funding.
If you have a significant personal
investment in the business you are
more likely to do everything in your
power to make the business successful.
Collateral or guarantees are additional forms
of security you can provide the lender.
If the business cannot repay its loan,
the bank wants to know there is a
second source of repayment. Assets
such as equipment, buildings, accounts
receivable, and in some cases, inventory,
are considered possible sources of
repayment if they are sold by the
bank for cash. Both business and personal
assets can be sources of collateral
for a loan. A guarantee, on the other
hand, is just that - someone else
signs a guarantee document promising
to repay the loan if you can't. Some
lenders may require such a guarantee
in addition to collateral as security
for a loan.
Conditions focus on the intended purpose of the
loan. Will the money be used for working
capital, additional equipment, or
inventory? The lender will also consider
the local economic climate and conditions
both within your industry and in other
industries that could affect your
business.
Character is the personal impression you make
on the potential lender or investor.
The lender decide subjectively whether
or not you are sufficiently trustworthy
to repay the loan or generate a return
on funds invested in your company.
Your educational background and experience
in business and in your industry will
be reviewed. The quality of your references
and the background and experience
of your employees will also be considered. |