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Four C’s of Commercial Lending

The Four C’s of Commercial Lending are: character, capital, capacity, and collateral. Let’s dive into detail about the significance of each C according to First Financial Bank.

Character: Every person has a reputation that is established through their past actions. This is known as an individual’s character, and in the real estate world, it will impact their relationship with potential lenders. Lenders will evaluate every situation in a unique manner, and a person's character may or may not be indicative of responsible financial behavior. For instance, an individual’s credit history is a strong factor in determining the quality of a person’s character. To boost one’s character, it is important to establish healthy patterns of repayment, avoid shortcuts, and stay honest. All in all, character assessment is a very important factor in commercial real estate when it comes to establishing a lending relationship.

Capital: Capital refers to the money, savings, investments, properties, and various assets that can be readily accessed to secure immediate funds. It also considers a person’s debt in relation to their available financial resources. It is vital to show that you have consistent cash flow. If you have a business, you should reinvest money into that business to display commitment to the future of your company. Raising capital is important, as more available cash and assets will correlate with less barriers when it comes to securing a commercial real estate loan.

Capacity: A person’s ability to repay a loan is known as their capacity. The way to measure capacity is known as the debt-to-tangible-net-worth-ratio. For instance, one is more likely to repay a loan if their business has higher revenues and lower debts. The principal idea is that you must have more money coming in than going out. As long as you are in this secure position, you are significantly more likely to secure a favorable commercial loan.

Collateral: The borrower's assets that can be pledged to secure the loan are known as collateral. Deposits, real estate, and equipment are prime examples of things that can be converted into usable funds, and therefore effective forms of collateral that may earn the borrower better interest rates. The most important piece of information to start building collateral is to secure and expand upon many different assets. The more assets you have on hand, the more prepared you will be for various loan options.


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