The four C’s of commercial lending Oct 17, 2013, 8:20 am By Heidi Carmack Pfaffroth


Guest post by Richard Gray

With the economy steadily improving, many businesses are looking to grow—buying their buildings, remodeling their spaces, growing inventory, investing in large equipment and more. The first step to obtain financing is to take a look at your business plan and current situation, and take that information to your lender to talk about your options. Preparing answers to the questions they will likely ask will help you stay on top of the game.

Last month I talked about why banks behave the way they do—what kinds of things factor into loan decisions and the process by which loan decisions are made. I mentioned that banks determine whether they will lend based on cash flow, credit, capital and character—the four C’s of commercial lending. Through these measures, businesses can demonstrate a solid ability to repay their loan in a timely manner.

So, what, specifically does each of these C’s mean, and why do they matter?

Cash Flow

The viability of your cash flow will be determined by analysis of one or both of the following: your company’s profit and loss statement, with the key figure being earnings before interest, taxes, depreciation and amortization; or its statement of cash flows, with the key figure being cash flow from operating activities. This analysis considers all of your debt obligations and will be used to determine your ability to repay the debt.


This is your ability to fulfill your financial obligations based on your own and your business’ financial history. Lenders will rely heavily on your business credit report that provides information regarding classification (based on size and creditor payment history), outstanding liens and pending lawsuits. In last month’s Enterprise there was an article about the weight of your business credit score. In that article, Lane Wilson said, “Just as a personal credit score helps or hinders a consumer’s ability to obtain credit, businesses also have credit scores that play a key role in securing financing.” If you’re interested in learning how to improve your business credit score, I would recommend reading that article.

Lenders will also consult a personal credit report to evaluate your debt obligations and come to a determination on whether your past indicates that it’s likely that you will make regular, on-time payments in the future. As a safeguard, you may want to pull your report ahead of time to check for errors (you should already be taking advantage of your three free credit reports from Equifax, Experian and TransUnion each year).

Another part of examining credit is a thorough review of your company’s financial statements, usually for the past three years. Financial ratios that look at liquidity, leverage and performance will be calculated from your balance sheets and P&L statements to be compared to industry averages.


Collateral is what you can offer as security for the loan. For small businesses, this may be commercial real estate and improvements (including land, buildings and fixtures) or investments (like stocks and bonds) that can be liquidated in the event of a default. Lenders are typically willing to lend between 50 and 90 percent of the value of the collateral (known as 50 to 90 percent “loan to value”). 


In addition to cash flow, credit and collateral, lenders also heavily consider “soft” traits, cumulatively known as character. These include your business background, business acumen, education, work experience and ability to be successful. Lenders learn this information by their personal interactions with you and your general reputation in the community, but also on the payment trends outlined in your credit reports, dependability of your entire management team, previous lawsuits or charges that indicate unethical behavior and background checks.

While the other three Cs carry a lot of weight, don’t underestimate the power that good character and a good relationship with your banker can have in your attainment of a commercial loan. This is when it’s advantageous to bank at a community bank with a local banker who knows you and can make a loan decision at the local level.

When you have your four C’s in line, talk to your lender about what kind of financing is available to you. If your business is strong in these areas, you will likely be able to finance the type of steady growth that helps communities and people to succeed. If one area is weaker than the others, talk to your lender. There may be programs or opportunities still available for your business. As always, your lender will be a great guide in helping you to find the right type of financing for your business.

Richard Gray is senior vice president of commercial lending and SBA lending at Bank of American Fork, Utah’s community bank leader, an Equal Housing Lender and Member FDIC. Richard also manages the bank’s Murray branch, and he has assisted local small businesses in obtaining SBA funding for more than 25 years. He serves on the board of directors for nonprofit Kostopolus Dream Foundation and was the chairman for nonprofit Utah Microenterprise Loan Fund, Salt Lake City.

This entry was posted in Business, Guest authors, Loans and tagged , , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *


100 Year On Blog
This blog includes articles, information, tips and advice on all things money by the financial experts at Bank of American Fork. But this blog is not one-sided; we want to hear what you think. Share your ideas, experiences and comments to get the dialogue going.

800-815-BANK (2265)

RSS Feed