If you are seeking funds relating to professional or personal purposes, then you consider applying for a loan to gain this capital. But it is not a cakewalk to get a loan approved by financial institutions. Although, to ease the process there are certain ways. To do so, access your financial condition from a lender’s perspective, this will help to figure out if you are credit ready or not. Tenders tend to evaluate a loan applicant’s creditworthiness based on the 5 C’s of Credit.
Now, you must be contemplating, what is the loan underwriting process? How is it connected with loan approval? To understand this, we will delve into the 5 Cs of Credit:
- Character
- Conditions
- Capital
- Capacity
- Collateral
What is the Underwriting Process of a Loan Application?
After you submit everything for a loan application, the documents and information are dispatched to a credit analyst for underwriting or scrutinizing the credit. Commercial lenders prefer using automated loan underwriting software to ease the process, save time and minimize the risk of human error. But before making an approval decision, the loan analyst learns and uses “the 5 Cs of Credit”.
What are the 5 Cs of Credit?
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Character
What is Character?
Character or Credit history is one of the most important criteria out of all 5 Cs. This is perhaps the hardest to qualify, but mandatory. Here the lenders try to check your financial character if you are trustworthy to pay your debts. They will pull out a credit report considering how you have been paying your past loans.
How is it accessed?
Character is accessed by in-depth checking of your credit scores and credit reports of both your personal and business credits. Besides, your repayment with other lenders and your market reputation of operating a firm are the primary factors considered while generating your credit score.
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Conditions
What are the Conditions?
Conditions are the current Economic conditions and the terms of loans, that might adversely affect the applicant. When processing loan applications lenders also inspect your purpose of seeking a loan. The lenders examine all this to reduce the risk of losing money
.How is it accessed?
Certain conditions are put by the lenders on the interest rates and the use of the loan. The lenders do not entertain the requests of any of the risk-heavy industries.
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Capital
What is Capital?
The overall financial condition of the applicant is considered by the lender. They inspect your balance sheet to find out your financial position, liabilities and outline your assets. Simply put, capital is the money that you have already invested in your business.
How is it accessed?
If you have invested a larger sum in your business, you can potentially get a bigger loan. It will indicate, the person can likely repay the loans and the intent of making your business grow.
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Capacity
What is Capacity?
Capacity refers to the ability of a person for loan repayment. It is calculated by determining the cash flow position, i.e. expenditure and the cycle of income.
How is it accessed?
It is analyzed by examining the bank statements, DSCR ( debt service coverage ratio), DTI (Debt-to-income) ratio, projections, and cash flows statement. These documents help the lender to determine the present business cash flows and what they can be in the near future.
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Collateral
What is Collateral?
Collateral is the asset that can be pledged as security for a loan, including jewelry, a car, a home, or other valuables. In case of defaults, financial institutions can seize the collateral and sell them.
How is it accessed?
Most of the lenders settle for certain collaterals such as home or property, while some want a personal guarantee or blanket lien.
Wrapping up
Each of the 5 C’s needs to be considered crucial as they have their own value.
Every lender uses these to evaluate whether a loan borrower is eligible for credit and determines related credit limits and interest rates.
