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Middleburg Bank, a division of Access National Bank.

The Basic 5 C's of Commercial Lending

Article written by Christopher Rieley, VP Commercial Lending

Traditional commercial lending theory, at the highest level, can be broken apart into 5 major components— each equally important. If a client has these 5 characteristics, most banks with traditional (non-robotic) lending processes will follow these guidelines to determine if an applicant is credit worthy, or too risky to provide a loan to.

The Basic 5 C’s of Commercial Lending:

  1. Cash Flow — Does the client have >1.25X Debt Service Coverage Ratio? This means for every $1.00 in current and proposed debt payments they can document $1.25 in income for the last three years, year-to-date, and in projections.
  2. Collateral — Does the borrower have sufficient collateral to back up the loan amount? Each type of collateral has a different advance rate. The client will get credit against the loan amount for 100% on Cash, 85% on Securities, 80% on Owner Occupied Real Estate, 75% on Investment Real Estate, 60% on Land. If they do not, a Government Guaranteed Loan Program such as the SBA will be the only solution.
  3. Capacity (AKA Cash or Capitalization) — Does the client have 10% of their total personal and business debt in cash reserve, AFTER they put their down payment into the transaction? Critical for start-ups , expansions, or construction.
  4. Character — Does the client have experience doing what they are proposing, or have they hired staff, or consultants to fill in the gap? Y/N.
  5. Credit — Is the client’s personal credit score higher than average? They must not have Bankruptcies or short sales, or maxed out credit line limits.

I am willing to have this conversation with anyone, and it usually takes about 5 minutes. Once a client understands these principles, applying for a loan is an open book exam that they can continue to re-take as many times as they need. If they are not qualified, they will have thresholds they can work towards to be able to qualify.

Contact Chris if you have questions about this, or if there is anything else I can do to help.

 

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