LEGACY BANK & TRUST Business > Business Lending > What Lenders Look For Business growth is going to happen. We want to help you be ready for it. Be prepared to put your best foot forward by learning the factors that are considered important to your lender. While the approval process can vary greatly based on a number of factors like loan type, length and the complexity of your business operations, the significant criteria used to analyze a request are commonly referred to as the 5 C’s of Credit: Character, Capital, Capacity, Conditions and Collateral. Learn About the 5 Cs of Credit 1. Character When applying for a business loan, your past history of repayment of both personal and business obligations are a key factor. Our local lenders will also assess your experience and success in your business and industry to gain an understanding of the likelihood of the continued success of your business. One way we might determine this is, with your permission, looking at your personal credit report as a way to understand how reliable you have been in repaying past loans. Your credit report is mainly a detailed list of your personal credit history. It consists of information provided by lenders that have extended credit to you. Credit reports typically provide a score, usually between 300 and 850. Generally, the higher the score, the better opportunities you have due to a lower risk assessment. 2. Capital Capital is a measure of a borrower’s investment in the chosen business or project. Capital can come in many forms, including a cash contribution, retained earnings, or other resources that might be pledged as collateral. While the appropriate or required amount of capital is often determined based on each individual need, bankers tend to look more favorably on a business loan request when the owner has made a significant personal investment. 3. Capacity Capacity refers to a borrower’s ability to generate sufficient profitability and cash to permit the agreed upon repayment of both the requested loan and any other related debt. A calculation that is commonly used to determine profitability is known as a “debt service coverage ratio” and can be defined as follows: Net Profit after Taxes + Depreciation Expense + Amortization Expense + Interest Expense / Scheduled Principal Payments + Interest Expense When the ending result for the above ratio is steadily greater than 1.0x, it suggests that business is generating enough income to repay the assumed debt. Several other factors can be used in determining the ability to repay the debt including the borrower’s ability to convert any assets to cash, history of successful collection of receivables and/or the amount of time needed to produce a profitable product. The best way for Legacy Bank and Trust to determine capacity is by analyzing historical financial results. However, in certain instances projected results may also provide an acceptable basis to form a decision. 4. Conditions Condition is the measure of the overall economic environment and an evaluation of the financial health of the borrower’s industry, the local market, and any competition that may exist. Lenders must understand how the current and future economic setting affects the company’s ability to repay loans. Open dialogue between you and your lender play an important part in understanding those conditions. Your discussions with us about your business’s competitive environment is an important part of this analysis. 5. Collateral Lenders prefer a secondary source of repayment to provide support if the borrower is unable to repay the loan. This typically takes the form of collateral, which are additional assets that are pledged to the bank. The value of collateral will be evaluated with an importance on the projected market value of the assets pledged. Collateral may not always be required in situations where a borrower has relatively strong levels of capital, cash and/or historical cash flow performance. With a clear understanding of The 5 C’s of Credit, you can put yourself in a position for a more successful lending experience. Apply Now Business & Commercial Loans Bring your goals to life with our customized business lending services. Learn more Agriculture & Farm Loans Here's a description of the service from Legacy Bank and Trust. Learn more Business Financing Solutions Work with local lenders who care about our community. Learn more Contact our Business Banking Team today to get started Contact Us Today Open a New Account Login to Online Banking Find a Location Learn More About Legacy Legacy Bank and Trust We’ve been serving the Ozarks since 1907, bringing our clients the personal service, attention and commitment we know they deserve. 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