How Does a Lender’s Evaluation of Character Effect the Loan Approval Process?

Lenders such as Virginia Commercial Finance will use the 5 C’s of Credit as a framework to gather a more holistic view of the creditworthiness of a borrower. When looking at a potential borrower, lenders want to evaluate the risk of default. Using the 5 C’s, a lender can effectively measure the quality of the potential borrower and the loan. Through the 5 C’s of Credit, a lender examines a variety of factors before reaching a decision on whether to approve. As a business owner, you can increase your chances for loan approval by understanding the 5 C’s of credit.

At a glance, the 5 C’s of Credit represent:

Character– broadly speaking, what type of person are you?

Cash Flow– the cycle surrounding the amount of cash coming into and out of a business.

Collateral– something you can pledge to back and secure a loan.

Capital– refers to the amount of your own money you have embedded in your business.

Conditions– the market conditions of your industry.

Over the last 23 years, we have financed over 500 companies. Through this experience, we have been fortunate to work with business owners who not only possess a strong business acumen, but are of strong personal Character as well. What we have learned is that while Character may be the most difficult of the 5 C’s to assess, in large part due to its subjective nature, it is the lynchpin that holds everything together. When trust can be built through transparent and honest communication, the relationship between lender and borrower can become a true partnership. This allows us, as a lender, to better serve our borrowers and stand by them through both good times and bad.

Yet the question remains, what is a lender focused on in regards to Character when evaluating your loan request?

In the same manner you evaluate the lender’s Character to determine if they are someone you can trust and depend on, the lender is evaluating you and your business. Lending is a practice completely dependent on reciprocated faith and trust. If you are respectful and carry yourself with integrity, a lender will be much more inclined to provide you their money. Even when times get tough for you or your business, will you remain honest and cooperative?

Communication is one of the most important aspects of Character that a lender will be evaluating in a potential borrower. Do you have a willingness and an ability to share pertinent information? Can you clearly articulate your business’ story? How did you get to where you are today? What are your goals for the future and how do you plan to get there? Are you willing to share past mistakes and any potential challenges you foresee the business facing in the future? You are the expert at your business and the lender will need you to share your expertise. Transparency is key to a successful lending relationship. Communication on both ends must always remain upfront, honest, and open. To maintain this, we also believe it is important not to have a hasty or knee jerk reaction to any news a borrower may share with us as their lender. Even in times of trouble, it is important to work with your lender, not run away from them. The relationship VCF builds with the owners and senior management allows us to work with you during challenging times to assist you in “reaching the light at the end of the tunnel provided the light is not a train!”

The personal credit history of the owners is another piece of the puzzle that a lender will often look at when evaluating Character. At VCF, we do not believe a person can be fully encapsulated and accurately represented with a number. However, if you have reliably paid your debts in the past, then this is a good indication of your future behavior. Your credit history can help determine if it is safe for us to provide you a loan in the present. We must be willing to trust someone’s ability to be able to pay their personal bills before we extend that same trust to their business. A low credit score could tell us that someone is not organized, does not pay attention to credit, and does not feel the need to pay their obligations when due. If someone has multiple credit cards, all completely maxed out, and are just making the minimum payments each month, they may not have a very good handle on their finances.

We check credit scores with the major credit bureaus, as well as the associated credit reports. Even if someone meets our minimum FICO score requirement, we are still likely to have further discussion if your score is below the national average. There are various understandable reasons why someone’s credit score may be low, such as a credit card still in dispute, and we take the time to hear out every individual’s story.  In addition, we may check public records or run a background check on the owners and other key members of the organization to ensure they have remained within the confines of the law. Of course, the business owners have every opportunity to elaborate on and explain past situations from their own perspective of what occurred. However, if you are aware of something that may warrant further explanation, it is helpful to share this with the lender on the front end.

We always take the time to learn all the facts to yield a more complete picture. We want to know your personal story. Where did you come from, and how did you arrive where you are today? What is your track record within your industry and with your business? How experienced are you with management or ownership?  Are you knowledgeable and prepared, or are you prone to uninformed and spontaneous decision-making? How do you treat your employees, and how would you describe the culture of your business? How have you worked with vendors, banks, and customers in the past? What is your mission statement? What are your values and objectives? These questions are not just limited to the owner(s) of the business; they are also ones we would like to pose to the entire team.

Good Character involves the integrity and capabilities of the business owner(s), as well as the rest of the organization.

Here at Virginia Commercial Finance, business owners have the empowering ability to access the credit-decision makers. We also believe it’s important to share the metrics we examine with the market place. Why make borrowing overly complicated? It’s beneficial to lenders and borrowers alike to demystify the process. It’s a two-way street: If we as a firm are going to ask a lot of questions, we think borrowers have every right to ask a lot of questions about us.

If you are of excellent Character, consider asset based lending as the best option for you and your business. Take advantage of the opportunities you may miss by not securing the financing you need- contact VCF today at 804-897-1200.