5 Cs of Lending (How Appraisal Fits in Even Though It Doesn’t Start with C)

Although this title may sound a little strange since appraisal doesn’t start with the letter c, most would-be borrowers probably don’t realize the role an appraisal can play in the eyes of lenders. The well-known 5 Cs of Lending consist of:

1. Character – Evaluation of the business’ financial performance, credit report, management, and payment trends; trustworthiness
2. Capital/Capitalization – Financial position of the business, including resources, fixed assets, net worth, and the owner’s equity
3. Capacity/Cash Flow – Funds available to repay the loan, which takes into account whether or not the borrower can continue to pay for all other business expenses, personal needs, etc.; debt ration
4. Collateral – Assets that can be used as security should the loan default (For this post, we are going to go into a little more detail about Collateral.)
5. Conditions – External market factors, like competition and market trends

The good thing to note is that even in today’s tight economic environment, lenders backed by the SBA are lending money; however, because of this environment, lenders are increasingly more cautious. This means they are conducting more careful due diligence, which includes their own certified appraisals of collateral to ensure that they will recoup their losses should a loan default.

Having all the Cs in a row – including having a defensible, impartial asset appraisal in hand – prior to seeking a loan can help increase the chances of being approved. Or, if there are some areas where a business may be weak in the eyes of lenders, a business owner can use this information to make changes and improve potential borrowing success. Understanding what lenders are looking for and how a certified appraisal fits into lending criteria can help business owners find the funds they need to grow.

By: Present Value

Other reading:

Five Myths of Business Valuations

Businesses Appraised by CMEAs

Lenders Turn to Present Value LLC for Pre-Loan Due Diligence

Tags: 5 Cs of Lending, asset appraisal, Capacity, Capital, Cash Flow, certified machinery & equipment appraisal, Character, Collateral, Conditions, due diligence, lenders, pre-loan due diligence
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