Considerations on a Bank Loan Application

 Dear M & M:

What are some things a bank might take into consideration when reviewing a loan application?

– George

Dear George:

Remember banks are not in the risk taking business. Generally there are five common loan areas any lender will take a look at. These five areas are commonly called the five c’s in banking. The five C’s are; Capacity, Collateral, Credit, Character and Conditions. The capacity is the ability of the lender to pay the loan back based on the business cash flow. Generally speaking they want to see if the business through operations can generate a profit with enough money left over after paying all expenses to pay the new loan.

One could show this through forecasted sales projections based on historical information through past income tax returns. The second area a lender will look at is called collateral. Collateral is simply assets the borrower puts up in case the loan defaults. Some lenders call this skin in the game. It shows you are willing to risk something and that you are committed to the success of this business. Collateral can be cash, property, equipment, inventory or anything a lender can sell to recover losses from the loan in case of default.

Generally, the more risk a lender takes on the more collateral a borrower will be required to put up to secure the loan. When a lender is looking at the third C they are looking into your previous credit history. Have you paid back you previous obligations? It is strongly recommended that you pull up your credit report and take a look so there are no surprises. A credit score in the 700’s is what a traditional lender is looking for. Character is the fourth C. Character encompasses many things such as reputation, integrity, background, experience, track record, and persistence.

Webster’s, defines character as the way a person thinks, feels and behaves. The final C is the conditions of the loan. Conditions generally include the length or term of the loan, interest rates, and other credit policies established by the lender. As always a completed loan application, three year history of the financial statements, personal financial statements of the owners, resumes of the owners, business debt schedules and a solid business plan showing how you will pay back the loan are some of the essential elements of a winning loan request. Source: Arizona Entrepreneur’s Edge, Arizona Commerce Authority.

-M&M

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation (EDF) at 520-458-6948 or email  hollism@svedf.org .

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