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The New 5-C’s of Commercial Loan Underwriting

Everybody who is involved with lending money has heard of the 5 C’s of credit.  Traditionally these C’s were Character, Capacity, Collateral, Conditions and Capital.

America’s small businesses have worked hard to survive the recent recession.  By all accounts, we are still in the beginning stages of a slow recovery with businesses starting to do a little bit better.  These challenging economic times require lenders to look at small business credit requests differently.

Which leads us to Lenders new 5 C’s of credit and why lenders should employ them when doing commercial loan underwriting.

  • Cash Flow
    Cash is the only thing that can be used to make a monthly payment.  It is absolutely critical that the lender understands how much money is available on a monthly basis to pay the loan back.
  • Current Situation
    We know that businesses were struggling in the recent past.  Many small business owners struggled to pay all of their bills on time 1, 2 or 3 years ago.  Many small business owners have seen declines in their total sales over the past few years.  However, lenders need to concede that this was a nationwide problem.  And, maybe, the small business owner has turned the corner.  Maybe, today, the business is back – and generating enough sales to comfortably make the payment.
  • Collateral
    Collateral remains on the list.  If things don’t work out for the business the way everyone hopes, then the lender must be able to liquidate secured assets to get their money back.
  • C-soning  (Seasoning.  I know, doesn’t really start with C – but it works)
    How long has the business been around?   How long has the borrower owned the collateral?  Long established ownership goes a long way.  The lender should take into consideration that the borrower has made it through the most difficult economy in recent memory, and is still fighting.
  • Commitment
    How much of the borrower’s life is invested into this business?  How much money does he have on the line?  Does it appear that this borrower could easily walk away from their business and their building – or is it exceedingly obvious that the only way this borrower leaves the building is when he’s carried out.

There are many good business loans to make today.  But, it will require lenders to think a little bit differently about their borrowers.  Commercial loan underwriting has changed, and the same 40-year old “5-C’s” no longer reflect the world of the small business owner today.

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