This article is the final installment of a five part series explaining what exactly the 5C’s of Credit entail. These are the criteria a lender uses to determine approval for a loan. The 5C’s are: character, capital, capacity, collateral and conditions. This segment thoroughly explains conditions regarding a loan.
Conditions are basically a summary of the other 4C’s of Credit. Their function is to clearly define the purpose of the loan, what the money will be going towards specifically and any possible outside effects such as the financial strength of suppliers.
Terms of the loan are carefully constructed throughout the process by a lender. This includes deciding whether the amount requested is sufficient and reasonable for the task it will be used for. The lender also considers if the applicant is capable of making appropriate payments.
It is also important to identify any risks that could be potentially associated with the loan. Often times, this includes any outside influences on the business. Supply risk or political effects such as legislation change fall under this category. The lender will want to know how exactly an applicant would plan to mitigate these possible risks. Be prepared to explain how and why they will not make an impact on the ability to pay back the loan.
When it comes to conditions, loan officers tailor the terms to each individual case. These terms could depend on the type of loan such as an operating loan or a term loan, which finances things like machinery, equipment or livestock. There may be more conditions on an operating loan, for example, because they are easier to control and renewed each year. A term loan on the other hand is harder to monitor due to longer periods of time before maturity.
When a lender determines the structure of the loan, it will be at the best interest of the applicant. If a person’s income is semiannual or quarterly due to the production or market cycles, the payment frequency of the loan will coincide. This allows for the best possible ability to re-pay the loan for the applicant.
Lastly, the lender will consider who is responsible for signing the loan. Anyone with financial interest in the business could be liable. This could be a manager of the operation, a partner who may not be actively involved in the actual operation or a spouse.
Working closely with your loan officer and understanding the 5C’s of Credit in which your loan proposal will be evaluated upon will make for a positive financial experience. By understanding these factors you will be knowledgeable and prepared to show your lender why you are a good candidate for the loan. To discuss the 5 C's and how they apply to you, contact your local FCS Financial lending specialist.
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