The 5 C's of Lending

Although this blog is not about lending, let me borrow a page from their playbook. Lenders always talk about the 5 C's of lending. They are:

1. Capacity


2. Credit


3. Collateral


4. Conditions


5. Character

Today we will talk about Character. Now that the economy has been in shambles for a while, many companies are starting to become desperate for any kind of business financing. It's a survival thing, and it's understandable. But credit crisis or not - the 5 C's still rule. Now, more than ever. Character - and this refers to the owners and managers - is critical. What is character?

Well, it varies by firm. In my little world of purchase order financing, for us, Character involves having prospects that either:

1. Have a complete clean slate. That is, they have good/reasonable credit and not blemishes such as bankruptcies/etc.

-or-

2. Have a blemished slate - that is explainable and reasonable. And also - be upfront about it. Don't wait for our underwriting team to find it.

You read #2 right. Don't hide it. Rather bring it upfront early and have sensible explanations for what happened. Even if you made a "dumb mistake", be upfront. That may not guarantee approval, but will almost certainly trigger respect. And respect helps you get approved.

Let me tell you a story about a prospect that I had years ago. They ran a successful start up that sold products to the government. They had not been able to get a business loan so they approached us for some financing. In their application they marked that none of the owners had ever been involved in a bankruptcy.

Our search indicated that they had a prior Chapter 7. When confronted, the owner explained that there had been a medical problem - coupled with a nasty divorce - that led to the bankruptcy. If they had explained this situation upfront they would have been approved. But they hid it and lied on their application. Unfortunately, we declined them.

This may sound harsh. But think about it this way. Problems will happen during a financing relationship. It's just how it is. We understand it. But we also only want to work with people that will own up to them and face them, not with people that will hide them until the problems blow up.

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Looking for information on purchase order financing? Read the purchase order finance blog to learn about business loan financing in wyoming