What does a lender look for?

What does a lender look for?
What does a lender look for?

The C’s of Credit:
Understanding Credit Criteria

When you begin searching for business credit or financing options, it's important to know what a lender will look for before you apply. Financing equipment and heavy machinery can help facilitate growth, which means it's critical that you understand the risk profile the lender will be using to approve an application.


Improving financing trends

More companies are seeking equipment leasing and financing options than ever before. According to the Equipment Leasing and Finance Foundation's report, "U.S. Equipment Finance Market Study: 2016-2017," 78 percent of the respondents said they took advantage of using financing for equipment in fiscal year 2015. This represents an increase of 4 percentage points from the previous study released in 2012. Further, the study found that of all the equipment and software acquired in 2015, 68 percent of it was financed - a major jump from the 55 percent in 2012.

The study also projected additional growth of 1.31 percent for 2016, and this trend is expected to continue.

If you're planning to obtain financing, there are several factors that lenders look for during the application process. You can break down the various qualifications into two verticals: The 5 Cs of credit analysis and the 5 Cs of documentation.


What are the 5 C's of credit analysis?

These are five of the factors lenders review during the credit application process to help them make an informed decision about your firm's creditworthiness, and they include, but are not limited to:

1. Capacity

How do you intend to make monthly payments? This covers your business's cash flow, payment history and current market share.

2. Capital

How much money do you already have invested in the business? Your company's debt-to-equity ratio will be a determining factor in whether or not your business has enough equity to shoulder more debt.

3. Collateral

What additional monetary or capital-based guarantees can you put forward? Although many lenders require collateral for obtaining business financing, obtaining leasing equipment or a commercial line of credit often does not involve this factor.

4. Conditions

What will the financing be used for? You should have a business-related usage for the financing, such as working capital, new office space or investing in new equipment.

5. Character

What kind of general impression do you make on the lender? Although this component can be tough to quantify, business experience, educational background and personal credit score all serve as factors that help lenders make an informed decision.

You will also need to provide the proper documents during the credit analysis process. Lenders will review your firm's financial history to determine company's financial strength and ability to repay any credit that has been extended.


The 5 C's of documentation

This list of items represents the baseline benchmarks for how lenders measure the quality of the documents you provide:

1. Caliber

What type of documents are you able to provide to the lender? High-caliber documentation includes tax returns and third-party audits in addition to company-prepared forms and compilations. Providing the lender solely with internal bookkeeping documents typically isn't enough.

2. Complete

Have you given all of the right documents? The more robust and complete your firm's documentation history, the better, so don't forget to include any documents that could be important in the decision-making process, including all debt schedules and forms. 

3. Consistency

Does your business provide the same set of documents every year? Having records from every other year isn't enough, nor is only having a portion of the available documents for a given filing.

4. Currentness

How recent is the information you provided? Outdated information won't illustrate your company's present-day financial situation and will only create a delay in the process, as the lender will request you provide it.

5. Conversation

Are you able to give the lender any needed explanations? A chat with the person reviewing your application can bridge the gap between any missing information and supplement your credit application. 

When you begin the process of seeking out business financing, whether in the form of leasing equipment or obtaining a commercial line of credit, keep the 5 Cs of credit analysis and the 5 Cs of documentation in mind. These can help your firm prepare for any questions or requests the lender might have, expediting the entire process and improving your company's chances of being approved.





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