In Spite of Media Reports, Banks Want to Lend

First National Bank-Fox Valley commentary on the 5Cs of credit by Wenda Roycraft

This commentary appeared in the September 10, 2012 edition of The Business News.

By Wenda Roycraft
Guest Columnist

While recent national media coverage may have you thinking otherwise, making loans is what banks do. This is especially true for locally based community banks, which provide the capital that fuels the startup and growth of many small- and medium-sized businesses throughout Northeast Wisconsin.

Those loans have great benefits for the local economy:

• A business starts or expands, creating jobs
• The bank makes money when the loan is repaid
• More capital is then available for future loans

Credit standards have tightened since the financial meltdown of 2008, some driven by regulation and others by better business practices. What determines the fate of most loan applications, though, is how a business ranks using a set of criteria lenders call the 5 Cs of Credit. Understanding those 5Cs, and what they mean for your business, is an important part of any loan application.

Character

Banks want to lend money to clients who have the best credentials and references. The way you treat employees and customers; the way you meet your financial responsibilities; the timeliness in fulfilling your obligations – that’s character. It’s a banker’s responsibility to look at the downside of making a loan. Character immediately comes into play if there is a business crisis. As a business owner, you place a personal stamp on everything that affects your company.

Capacity

What is your company’s borrowing history and track record of repayment? How much debt can your company handle? There are numerous financial benchmarks such as debt and liquidity ratios that banks review before making a loan. Banks are not doing borrowers a favor by lending them too much money that they cannot provide an adequate repayment source. Are your financial statements in good shape?

Capital

How well capitalized is your company? How much money have you invested in the business? Banks want to see that you have a financial commitment; that you have a stake in the company. Having adequate plan for financial stability in your company and your personal credit are keys to the capital question.

Conditions

What are the current economic conditions and how does your company fit in? If the business is sensitive to economic downturns, the bank wants to know that you are good at managing productivity and expenses. Are there any economic or political issues that could negatively impact the growth of your business?

Collateral

While cash flow will nearly always be the primary source of repayment of a loan, bankers look at what they call a secondary source of repayment. Collateral represents assets your company pledges as an alternate repayment source for the loan. Most collateral is in the form of real estate, manufacturing equipment and/or current assets. You’re nearly always going to have to pledge collateral. If it doesn’t come from your business, the bank will look to your personal assets.

When evaluating the five C’s of credit, banks don’t give equal weight to each area. One weak area could offset all the other strengths you show. Bankers evaluate your company as a total package, which is often more than the sum of the parts.

The biggest element to having a successful borrowing strategy will always be having open communication and ongoing relationship with your banker.

Wenda M. Roycraft is the senior vice president of commercial banking at First National Bank-Fox Valley. FNB-Fox Valley is a “preferred” SBA lender and was recently named the top lender in its class for loans made during the 2011 fiscal year.