The Five Cs - Understanding the Lender's Decision-Making Process

The Five Cs - Understanding the Lender's Decision-Making Process

Article By: Jacob Bauer

A common loan myth is that a good credit score is the sole factor bankers use to approve or deny a loan. While your credit score will be considered, there are many more factors considered when lenders decide whether to take on a loan or not. Read about the five Cs of credit to learn about the elements that make up the loan decision process. 

1. Capacity - Also known as cash flow coverage.

Lenders will look at the ratio of EBITDA compared to debt. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Lenders look at EBITDA because interest is included in debt payments and depreciation and amortization are noncash items. The reason the bank analyzes capacity is because no one wins if the business takes on debt the borrower can't pay for. The lenders are making sure you can afford the loan payments by reviewing cashflow coverage.

2. Capital - This is your skin in the game

Typically, banks will require a down payment of 20% - 50% depending on the collateral being pledged. By analyzing capital, lenders are looking at what the borrower is putting into the project or purchase. This is done through cash or equity. The business balance sheet or the borrower's personal financial statement is analyzed to insure they have sufficient capital for the purchase.

3. Collateral - What is being used to secure the loan. 

This is a security for the bank so if payments aren't made the bank gets repaid from the sale of the collateral. The collateral needs to be in a condition where it would pay back the money loaned out if it had to be sold. This is typically done through an appraisal or evaluation of asset.  

4. Character 

Lenders analyze if the borrower has the integrity to stay true to the promise they signed. They will look at historical data to predict the character of the borrower in the future. This search includes reviewing the Wisconsin Circuit Court findings and credit reports.

5. Conditions

As a local community bank, we are considered partners in business with our clients. SFB is always doing research on the market, asking customers about what they are seeing in their industries, and updating our loan policy to match the current market rates.

Any one category can be mitigated by another category's strengths. For example, adding sufficient capital can alleviate the lower character aspect if needed. They all work together to supply evidence in the loan approval decision.

For more information, we encourage you to contact a Security Financial Bank commercial lender. Our bankers can answer your questions and help you through the loan process.

Jacob Bauer is a relationship manager based out of the Bloomer office. He has experience with small business loans as well as financing the purchase of existing businesses and real estate investments. Connect with Jacob at or 715-930-7880. Schedule an appointment online here