I’ve already talked about cash flow and collateral in this space, and—from the perspective of a business lender—those are definitely the two capital C’s among the C’s of credit. They are the “grownups” of the Credit family, if you will: the two factors in a credit decision that are easiest to objectively quantify, and perhaps the two most directly tied to the success or failure of most loans. Still, experienced underwriters are careful not to ignore the little C’s of credit, because these quickly can grow into really big problems if judged incorrectly. The thorough analysis of any applicant’s Character, management Capacity, and the suitability of prevailing market Conditions are all vitally important to any credit decision-making process. And even though assessments of these three credit factors are usually more subjective than those of cash flow or collateral, it is important for you to have an idea of the qualities prospective lenders are seeking in those areas as they evaluate your loan
For a moment, put aside the Biblical admonition not to judge others. Credit decision-makers are paid to judge your character. The primary reason for the existence of credit reporting agencies is that nervous lenders are trying to determine if you are a good credit risk. They ask themselves if you will repay their loan, and do so on time. They forecast the future by probing the past: have you repaid previous bills on a timely basis? Scores in the mid-700s and up tell them that, yes, you most certainly
do! Conversely, scores below the mid-500s indicate a general pattern of not repaying loans according to their terms.
Helpful hints: if your credit score has taken a hit recently, but you have handled credit responsibly in the past (e.g., you formerly had a higher credit score), some lenders may take this into consideration after a written explanation. Do not apply too liberally for credit, particularly in situations where your credit report is likely to be pulled (credit scores generally decline as the number of inquiries increase).
Try also not to use more than 30% of your availability on any credit cards, which can also drive your score down. Judging management capacity is usually a matter of matching up past experiences and education with the opportunity at hand. For instance, if you have attended culinary school, been a master chef for a number of years, and then managed the kitchen operations of a very successful restaurant, most would assume the next logical step would be opening up your own restaurant. It would not be a big stretch to think that you had developed some capacity to operate a restaurant. On the other hand, if you had the same experience as a chef and suddenly decided to apply for a loan to buy a muffler repair shop, you’ve got quite a bit of explaining to do. In that scenario, even if cars were a long-time passion of yours, you probably would not have demonstrated the professional capacity to run a muffler shop, which is a very different business than a restaurant. In a nutshell, be careful to show how your business opportunity is aligned with your professional experience and/or educational background.
Finally, when seeking a loan, it is important that current market conditions are suitable for your business opportunity. Once, I extended a loan to a business that depended heavily on the hospitality industry. The owner’s character was solid. His business plan was impeccable. He had run the same business for years, and there was a history of good cash flow, with good collateral support. What could possibly go wrong? Well, I made the loan just weeks before September 11, 2001! Airlines were
grounded for months; the hospitality industry suffered for years. And the borrower had a tough time. There was no way to have known in advance the conditions that were about to occur, but I can confidently say that if we both had known, neither the borrower nor I would have wanted to close
on that loan—all the more reason for you to thoroughly research all the current market conditions that you can know.
While subjective, your lender’s perception of these three C’s of credit is largely in your control. Manage them well, and your likelihood of getting approval for that business loan should increase dramatically.