Business Tip Vol. 9 - Obtaining Business Credit

Much has been in the news regarding the current lender problems.

It appears that even commercial banking lenders will soon be having problems of their own soon. One of the reasons both are having problems is that for the past few years they have veered away from prudent lending practices.

As a lender, 11 years ago, me and my bosses continually reviewed the Five "C's" of Credit on each and every deal our bank did. Those "C's are

1) Cash Flow (aka capacity) - Where is the money going to come from to pay off the loan. Usually this is matched with the asset purchased ie If you buy a rental property, the rents will be the cash that pays the loan.

2) Collateral - What I always term the secondary source of repayment. Usually this asset is what secures the loan.

3) Capital (aka net worth) - What other available resources does the borrower have at his disposal to repay the debt. The more liquid the better.

4) Character - The most subjective indicator of repayment. You can usually get some measurement of character by looking at a credit report. Does the borrower pay on time or do you always have to call them for payment?

5) Conditions - What are the general market conditions that could effect your loan? For instance, you would probably rather loan money to technology companies over mortgage companies right now. "Conditions" are generally out of the control of the borrower.

The weaker any one of these "C's" are the stronger the others have to be. For instance, if you have bad collateral, you are going to need to document stronger cash flow and/or capital.

The "C's" are just as important to personal credit as it is to commercial credit.

I can almost guarantee that where a loan goes bad, you will find that one or more of the "C's" was or was becoming a problem before the actual collapse.

In the example of mortgage lenders. Lenders were willing to do 100% financing (collateral) to people who were strapped from day one to make payments (cash flow). When interest rates increased the cash wasn't there to pay the debt and the collateral deteriorated to where foreclosures couldn't pay back the loan.

Beginning next week, I'll illustrate each of these in detail and how you can protect yoruself.