Banks and lenders carefully look at each borrower’s background, credit behaviour, and many other aspects before lending any money. Especially during the ongoing tough financial times, bankers carefully consider the 4Cs of every borrower for business loans. Here are the 4Cs in detail:
- Character - Character comprises the financial history of the borrower. It indicates the kind of credit-worthy person or business the applicant is. Character comes from credit history and in particular, from the credit score. A high credit score (above 700) is the most important factor in easily getting a loan. Some factors that affect your credit score include:
- Late payments
- Delinquent accounts
- Available credit
- Total debt
- Capacity - Capacity is the ability of the borrower, individual or business, to repay the loan. Since a new borrower may not have a credit track record, banks and lenders consider them to be risky. A borrower’s monthly cash flow has to be positive for banks to easily grant loans.
- Capital – If it’s a business loan, lenders look at the capital of the business carefully before granting a loan. It refers to the capital assets of the business, including machinery, equipment, product inventory, etc. A lot of banks prefer businesses to have cash as part of the capital to easily access liquid resources in case of loan defaults.
- Collateral - Collateral is the cash or assets that a loan borrower pledges against the loan. Apart from having good credit, the borrower’s ability to pledge their personal assets can help in securing a loan easily.