Different banks exist because it’s not “one size fits all” when thinking about credit policy. They have differing risk tolerance levels with various types of loans, collateral, and certainly industries.
Do you know what your bank is looking for when they are evaluating your loan request? Each bank has a thorough understanding of what their bank’s credit limitations are. As a potential Borrower, you must recognize the key drivers that allow the bank to accept your application. The bottom line is do you measure up to the bank’s credit policy standards?
At VCF, creditworthiness is evaluated using the Five C’s of Credit. Knowing how your bank views risk related to the Five C’s will streamline your understanding of the eventual success of your loan request. As part of a self-assessment, consider answering these questions in preparation for completing a loan application.
CHARACTER: What is the tenure and success of the existing leadership team? How deep is the existing management team? Are the personal credit histories of the owners/guarantors acceptable? What is the succession plan?
COLLATERAL: What is the collateral for the requested loan – short v. long term assets? Does the collateral match the loan request? Are there current appraisals for long term assets (FFE and real estate)?
CASH FLOW: Is there consistency of recurring cash flow? Have detailed explanations been prepared to discuss the reasons behind insufficient cash flow? How does the credit policy address cash flow financial ratios? Have detailed short term and long term projections been prepared? Have historical or recent losses been fully explained? Has a corrective action plan been created?
CAPITAL: What is the current equity in the business? Is there any owner or third-party debt that can be subordinated to the senior lender? Are there any plans for additional cash injections into the business? Are there any outside assets that can be pledged to the lender to bolster the overall strength of the loan request?
CONDITIONS: Are industry conditions positive or negative? How is the company mitigating negative industry trends and benefiting from the positives?
These are just a few questions to consider when assessing the Five C’s. As a Borrower, knowing how your bank assesses risk is great insight on business planning and decision-making. This knowledge will also allow you to “check the boxes” when making a loan application while ensuring that you are giving yourself the best opportunity for loan approval.
If you are seeking financing and can’t fit into the credit policy at a traditional bank, consider a strategic alternative lender, such as VCF, who may be able to provide a creative solution to your financing needs.