What does a commercial lender consider in a loan request?
Many people seeking a commercial loan may be confused by the information required by a lender. Understanding why particular information is requested will lead to a quicker, more successful loan application process.
When examining a loan request, lenders consider the “5 Cs:”
- Credit. As history is the best predictor of the future, a lender will examine the personal credit of all borrowers and guarantors. Good personal credit is a must. Any problems must be thoroughly explained.
- Character. Lenders need to know the borrower and guarantors are honest and have integrity. In addition, the lender needs to be confident the applicant has the background, education, experience, and industry knowledge to successfully run the business.
- Capacity (Cash Flow). The business should have cash flow to support its business expenses and debts while providing the principals sufficient salaries that will support personal expenses and debts.
- Collateral. A lender will consider the value of the business’s assets and the personal assets of the guarantors securing the loan as a secondary source of repayment if the loan cannot be repaid. Collateral is an important consideration for a conventional loan but not as imperative with an SBA loan.
- Condition. The lender will need to understand the condition of the business, the industry, and the economy. Are current conditions likely to change, deteriorate, or improve?
Whether you seek a loan from a large national bank or a local institution, the 5 Cs are lending’s critical criteria. Organizing your information and delivering it in a timely manner will help the process.
Authors Ed Webman, RPh, and Brian Faulk are with Live Oak Bank, which provides loans to independent pharmacies throughout the United States.
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