4 Aug 2009
I recently caught up with a friend of mine who is a senior banker. He is a senior risk assessment person. In a bank, the people that deal with risk assessment are the people that really decide whether you will get your loan or not. Typically when you deal with a person at a bank, you are dealing with the relationship or "sales" person. These people usually do not decide whether you get your loan. It is the risk assessment person that really makes the decision.
My friend spoke of the five Cs of banking. These are the core things by which he evaluates a finance proposal. These are:
Character. This is about you, the borrower. Are you made up of the right "stuff" to give the bank confidence in you? What is your track record like? Are you the type of person that takes their commitments seriously? Do you have the emotional and character stability to be able to go the distance?
Capacity. Simply, have you got the ability to repay the loan? How good is your cash flow? How much possible variation is there with your cash flow? Do you manage it and try to predict when there could be problems?
Capital. This is about the capital that you are putting on the table. This is your "hurt money". Firstly, if you have some money to put into your business venture it may say something about your past ability to make and save money. Secondly, the more of your own money that you are willing to supply as capital, the more you have at risk and, in theory, the more effort that you are likely to put into the business undertaking.
Collateral. Banks need two ways of getting their money back. The first method is by you repaying the loan in a normal fashion. But if you can't repay your debt to the bank, the bank needs another method to recoup the money it has lent you. This is called security or collateral. From the bankers point of view, having a family home tied to the repayment is often what they want. Most people will work hard not to lose their home. However, the family home is not the only security that bankers will take or may want to take.
Condition. This is about the conditions under which the loan will be made. Often these are called covenants. Frequently, when lending to a business, the covenants will be financial ratios that need to be maintained. For example, the bank might want to ensure that your profit before tax and interest is at least two times the amount of interest. Also there may be information covenants such as a need to report to the bank every three months in a set format.
Wishing you easier business.
John Jeffreys