4 C’s of Commercial Lending

Are you considering applying for a commercial loan to grow your business? Make sure you are loan-ready by reviewing the 4 C’s of commercial lending: cash flow, credit, collateral and character.

Cash Flow
The debt coverage ratio (DCR) is used to measure cash flow and evaluate whether a business can afford loan payments. DCR is determined by dividing net cash flow from operating income by debt payments. Typically, lenders require a DCR of 1.25 or higher.

Other ways lenders evaluate cash flow is by examining your company’s profit and loss statement or its statement of cash flows. In the P&L, earnings before interest, taxes, depreciation and amortization (EBITDA) is the key figure. In the statement of cash flows, the key figure is cash flow from operating activities. These evaluations consider all of your debt obligations and help a lender determine your ability to repay the debt.

As a small business owner, you are the business, so both your business and personal credit reports will be used to determine your ability to fulfill financial obligations. While SBA loans can overcome certain shortfalls in loan credit applications, good personal and business credit is a necessity. On your business credit report, lenders will look at information regarding classification (based on size and creditor payment history), outstanding liens, and pending lawsuits.

In addition to pulling your credit history, lenders will review your company’s financial statements for the past few years to ensure your company’s various financial ratios are on par with industry averages.

Collateral on commercial loans will vary depending on the type of loan. Lines of credit are typically secured by short-term assets, such as accounts receivable and inventory, while equipment loans use the actual financed equipment as collateral. For an owner-occupied loan, in which you seek to be the majority tenant in a workspace, the building you are occupying is used as collateral for the loan.

The first three C’s revolve around hard-and-fast numbers, but lenders also consider a non-financial factors when qualifying potential borrowers: character. This includes your business philosophy, past experience, business savvy, education and work ethic. If you are lacking in the other C’s, this is your opportunity to shine.

If you meet the above criteria, your lender will determine the type of loan that meets your needs within the bank’s risk tolerance and you will be on your way to growing your business.

For more information on how you can benefit from SBA owner-occupied lending, visit our SBA page.

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