Lenders talk about the 5 C’s regarding business borrowers:Cash Flow, Collateral, Capacity, Conditions, and Character.
Cash Flow has to do with the amount of cash the business generates. It looks at the business’ revenue and its expenses. Cash flow analysis identifies the earnings a company produces; the lender knows those earnings will be used to pay down the loan interest payments and principal so it is look for sufficient earnings. Collateral has to do with the business’ assets such as equipment and inventory. If need be, the business can sell its collateral to make good on its commitment to pay down the loan. Capacity has to do with personal assets the business owner has. If cash flow and collateral is insufficient to pay back the loan, the owner can always rely on these personal assets. That’s why if the owner has real estate or a large personal bank account, this will increase the likelihood a small business will be approved for a loan.
Conditions refer to the general economy; are we headed for a recession, or are we in the early stages of a growing bull market? Lenders will lend more in the latter than the former.
But beyond these four elements is the fifth- Character. Character can be defined 100 different ways by 100 different lenders. But ultimately it has to do with the honesty and integrity of the borrower. Character impacts all the other C’s because if a borrower is dishonest, the lender may not believe the provided documents to attest to Cash Flow and Collateral, for example. A dishonest borrower may forge or manipulate these documents. So how will a lender ascertain your character?
For some lenders, they keep it simple. They evaluate your personal credit score as a proxy of character- the sum of your past willingness to keep your commitments to lenders. Others will also order a background check of you and other owners to determine if there is any criminal history or indicators of lack of commitment, such as defaulting on student loans.
According to “Money, Money Everywhere”:
Character. It’s a crucial step in the loan application process. You must convince your banker you have what it takes to succeed…..For them, for bankers today, determining character is the most important task. If they purchase an item, or take one in on loan or pawn, and that item is stolen or fake, they lose their entire investment. This is no different than any other borrower from the bank. If the intention of the borrower is not to pay back the loan, in actuality there is little the bank can do about it…..
Your reputation was defined in the past by your associations in the neighborhood, but today that reputation is more defined by how you show up on Internet search engines.
Did you do your assigned homework and Google your name? Bankers now understand more than ever that Google helps define your character. When the banker types in your name and an unflattering article pops up, that will be extremely negative to your case…..Other character tests are old school. In the past, it was important what organizations you belonged to, what country club you belonged to, and the lineage of your mother and father. Google has replaced that caste system.
If you there are negative accounts written about you on Google, there are ways to address it. You can contact the website and request a take-down of the offensive material. Another option is to work with a company that specializes in improving online reputation such as Reputation Defender. Companies like Reputation Defender create original content and use search engine optimization to rank positive articles about you while pushing down in the search engine negative accounts. This means that when people search your name, they will see the good representations and may not see the negative accounts unless they click to later pages on Google.
Knowing that Character is central to loan approval means that you can take proactive steps in preparing yourself prior to the loan application to give yourself the best shot of approval.