The Future of Business Lending: Redefining the 5 Cs of Credit

Note: This is a guest post by Paul Giefing, CEO and founder of UPLEX Global. We’re honored to have him on our blog:

Whether you are a bank or a credit union, chances are you have always followed the guidelines of assessing the 5 C’s of credit for all business loans, just as you were taught. These are the five key elements a borrower should have to obtain credit:

1. Character (integrity)

2. Capacity (sufficient cash flow to service the obligation)

3. Capital (net worth)

4. Collateral (assets to secure the debt)

5. Conditions (of the borrower and the overall economy)

Times have changed and the weight which each of the C’s carries has also changed … dramatically, in my experience. While all still need to be assessed, I want to pay special attention to numbers 1 and 2 on my list above.

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In this current market/economy, numbers 3, 4 and 5 have taken on a new light:

-(#3) Small businesses owners have taken the same hit that their business has. It stands to reason that these owners are going to show a net worth that has taken a serious hit as well. It still helps to see if they have managed their cash and debt intelligently, but nearly all of them will be on a slide over the last five years.

-(#4) Perhaps the biggest lesson from our banking fallout over the last five years is that collateral is not always what it appears to be. How many banks were happy to have a portfolio full of commercial real estate loans three years ago? Heck, now?

-(#5) Conditions are a given right now. This nation is still struggling to turn a corner and grow. It effects most business/people equally, so we just need to keep our finger on the pulse of the economy as a whole AND on any industries / sectors we may want to focus on. For the individuals, let’s see how many boats / airplanes they bought when times were good vs. how much they saved/reinvested.

In this economy, the Character of these business owners and their Capacity to make changes and carry the load are what we need to focus on. These are the variables that tell us who was willing to make concessions, who was able to get skinny when times were tight and who was saving something before the collapse happened. These are the characteristics of borrowers (and probably their small businesses) that can weather the storm and make plans for the future.

Collateral is only as good as the market says it is and most just doesn’t hold value. Going forward, I don’t think it ever will hold the same type of value is has in the past. The make-up of an individual is the true indicator of how you will be repaid on your trust. Determining this is more an art than a science – so be prepared to re-learn a few things!

About the Author
Paul J. Giefing, MBA, is a 14-year veteran of the banking industry and the CEO and Founder of UPLEX Global, an online global loan exchange. His background includes commercial and business loan underwriting, sales and systems development. An Indianapolis native, he has spent years working with small banks and credit unions in a referral and consulting capacity.