When applying for a commercial loan ( business loan or real estate loan ) lenders assess your credit risk based on a number of factors like credit and payment history, income, and your overall financial situation. Qualifying for the different types of credit depends on your credit history — i.e. the track record you’ve established while managing credit and making payments over time. Your credit report is primarily a detailed list of your credit history, consisting of information provided by lenders that have extended credit to you. Yes, information may vary from one credit-reporting agency to another but the credit reports include the same types of information, such as; names of lenders that have extended credit to you, types of credit you have, your payment history and more. We’ve complied additional information to help explain these factors; in the banking industry is known as the “5 C’s”.
Capacity:
Lenders need to determine whether you can comfortably afford your payments. They typically start with your income and employment history as indicators of your ability to repay outstanding debt but income amount, stability, and type of income may all be considered. Your (DTI) or debt to income ratio may be evaluated.
Character:
Before loaning money to your business, lenders will try to determine whether you are a trustworthy person and likely to repay funds that are loaned to you. To get an accurate picture of your character, they will examine your credentials, education, business experience, references and reputation. They will also look at the soundness of your business plan. If you have delinquent accounts, large amounts of unsatisfied debt or pending lawsuits, lenders could see these as warning signs and avoid granting the funding you’ve requested.
In addition to the credit report, lenders may also use a credit score that is a numeric value – usually between 500 and 850 – based on the information contained in your credit report. The credit score serves as a risk indicator for the lender based on your credit history. A good rule of thumb - the higher the score, the lower the risk. Credit bureau scores are often called "FICO® scores" because many credit bureau scores used in the U.S. are produced from software developed by Fair Isaac Corporation (FICO). While many lenders use credit scores to help them make their lending decisions, each lender has their own criteria, depending on the level of risk it finds acceptable for a given credit product.
Collateral (secured loans):
Loan products fall into one of the two categories - secured or unsecured. With a secured product, such as an auto or home equity loan, as the borrower, you are pledging something you own as collateral. The value of your collateral is evaluated, and any existing debt secured by that collateral would be subtracted from the value. The remaining equity will play a factor in the lending decision.
Capital:
While your household income is expected to be the primary source of repayment, capital represents other assets like savings and investments to help repay the loan.
Conditions:
Lenders generally want to know how you plan to use the money. This helps them consider whether the loan will be used to purchase a vehicle or other property. Other factors such as environmental and economic conditions may also be considered at the time of application.
The 5 C’s of credit explained is a common term in banking. Now that you know them, you can better prepare yourself for the questions that may be asked the next time you apply for credit.
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