“The 5 Cs of credit have been around a long time, and they’re still rock solid,” says Dana Sumner, president/co-founder of Development Finance Training and Consulting.
But how they’re categorized and considered during the business lending process differs somewhat from consumer lending, he tells students at the CUNA Business Lending Certification School Wednesday in Madison, Wis.
He offers questions to consider when considering each of the “Cs” for business lending.
Does the business demonstrate a history or project an ability to make payments from operating income?
How does the borrower source and use cash? Do you understand how all debts affect the borrowing group?
The primary question is whether the borrower can pay from a transactional (cash flow) or a global basis, Sumner says.
Transactional is almost always preferable because business lending is about cash flow, he says. “If it’s global, you need have to have a deep understanding of the business.”
Does the borrower provide an equity position that would sustain repayment should cash flow be interrupted? Does borrowers’ capital position support a “going concern?”
Does the borrower offer supported down payment sources?
“Capital is how much skin they have in the game,” Sumner says. “Do they have a fall back plan if things begin to go sour?”
Has the borrower demonstrated honesty and trustworthiness? Is there evidence of good or bad financial citizenship?
Character is the most subjective of the 5 Cs, Sumner says. “Character is difficult to quantify. It’s hardly ever black and white. You almost always have to rely on what your gut tells you.”
Has the collateral value been established by prudent and accepted commercial lending practices? Is the collateral readily marketable?
Can the assets by appropriately secured?
Credit unions typically feel most comfortable taking real estate as collateral, Sumner says.
What are the economic risks associated with the company’s operations? What is the status of the borrower’s industry?
What is the company’s competition, and how does the company compare and compete?
Conditions can be as big picture as the economic environment and as granular as a construction project that reroutes traffic for retail businesses, Sumner says. “This is where it gets complicated as a lender. Not only are we looking at the ability of the business to repay, we’re looking the long-term business prospects for that business.”