The 5 Cs of Credit: Character

We have discussed what types of information lenders and the SBA require when applying for a 504 loan, but how do they evaluate the information? Although every lending situation is different, most lenders use the Five Cs of Credit when assessing your loan application. These are Character, Capacity, Capital, Conditions and Collateral. We will examine each of these areas and why they matter in the lending environment.

The first C is character. Character is defined as the mental and moral qualities distinctive to an individual. It is perhaps the most important of all qualities of credit. When asked if commercial credit was based primarily on money or property, financier J.P. Morgan replied, "No sir. The first thing is character. Before money or property or anything else."

Lenders still prize character today. Banks want to loan money to people with good credentials and references, but they also consider how you take responsibility, and how you treat your employees and customers.

It is unlikely that a lender will know you personally, so they must evaluate your character using a variety of information and subjective measures. They will review your credit history for delinquencies and examine your payment records. Every lender that has extended credit to you will provide this information to credit reporting agencies.

Lenders may also use a credit score with a numeric value. This is sometimes referred to as a FICO score. This score is based on the information in your credit report and indicates a perceived level of risk to the lender. The number is usually between 300 and 850, where the higher the number, the lower the risk. While lenders may use this score, each lender has its own criteria for determining acceptable risk.

Beyond just your credit history, character is also measured by your educational background and business experience in your industry. Lenders may also consider the quality of your references and the experience of your employees. This information is important in determining your ability to repay the loan.

Another quality of character is a borrower's willingness to repay the loan. As this is impossible to qualify with numbers, a lender's decision in this area is subjective. It is usually discovered through a personal interview and gathering information regarding how you have managed your business and responded to adversity. Lending institutions want to feel confident that you will stand by your business obligations in times of crisis. Honesty, integrity and a good reputation are key.

Although character is highly important to a lender, each of the 5 Cs plays a crucial role in the decision process. We will be examining the other Cs of Credit in the future. If your business is weak in one area, focus on your strengths in other areas. Community Business Finance will help you identify those strengths and provide you with a choice of commercial lenders.

Contact Community Business Finance and discover how our knowledge of SBA 504 loans can get your business the financing it needs.

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