How Lenders Evaluate Your Loan Request

July 27th, 2009

Your credit score will, in the end, probably determine whether your loan request is approved or not, at least for smaller loans . But in their evaluation of loan requests,  lenders also evaluate you based on Character, Capacity, Collateral, Capital, and Conditions—the Five C’s of Credit. What they really want to know—and it’s also what your credit score tells them—is: Will you pay? Can you pay? But they also want to know: What if you don’t pay? How much do you have at risk? And what might happen to your company, to the economy, or to your industry that might impede your ability to re-pay your loan?

When your loan proposal first hits a lender’s desk it’ll receive what we call the Hairy Eyeball Test. Essentially, a lender will quickly assess:

• How much are you looking for?
• Are you have enough money and cash-flow to carry the requested debt?
• Do you have enough collateral to cover the loan?
• Do you and your company have a reasonable balance between debt and equity?
• Does your credit score suggest you’re an acceptable risk?

That’s it, in five minutes or less they’ll decide if your deal has half a chance. If it does, they’ll look more closely at the Five C’s of Credit.

The key to convincing your lender that you’re a good credit risk, whether you have a good credit score or not, is to avoid surprises. Nothing will scare a lender away quicker than the feeling or discovery that you’re hiding something. If you’re aware of mistakes or legitimate problems be sure to address them with your lender.

For details on how your credit score is determined see Chapter 4 in the Finding Money ebook. You’ll discover, among other things, that your credit score is actually a product sold to lenders by companies that don’t reveal exactly how they’re computed. But we have a chart shown at a conference a few years ago that goes into far more detail than you’ll find elsewhere.

We also explain what factors can cause problems (and how to avoid them) when it comes to credit and background checks, and lien and encumberance checks.

Comments are closed.