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How We See It

Keith Purvis

Keith Purvis

June 8, 2012

What is Credit Analysis?
By: Keith Purvis, Vice President & Commercial Lending Officer

What is credit analysis and how will it be used when I request a business loan?

I am sure that everyone has heard the news reports that businesses cannot get loans and banks are not lending any money.  Texas Bank and Trust is lending money to businesses and one of the ways we review loan requests is by the traditional “Five C’s of Credit.”  The Five C's of Credit are: Capacity, Capital, Collateral, Conditions, and Character.

The 5C's of Credit:


Capacity is considered the most critical of the five factors because it is the primary source of how the loan will be repaid.  Cash flow to repay the debt needs to come from the income of the business.  If the business does not have enough income to repay the debt, other external sources can be considered such as personal income, guarantor income, etc.  You must be able to demonstrate to the bank that the business has the “Capacity” or cash flow to repay the loan.


This is how much money will you personally invest in the company, which is also sometimes also called Equity.  The amount you invest shows the bank how much you are willing to risk of your own money.  Be prepared to be willing to invest at least 10% to 25% in the business.  You might ask - what if I don’t have that kind of Capital?  You may have other assets that you own that could be pledged or borrowed against to help provide the needed Capital for the loan.  Some examples might be your home, cars, boats, or other assets that you could borrow against to raise money.  Remember, if you do this the total repayment of that debt will be considered in the Capacity section of the 5 C’s as
discussed above.


Collateral is simply something that you own that you will pledge to the bank to secure the loan (inventory, accounts receivables, your personal home, rental property, car, boat, stocks, bonds, etc.). Collateral protects the bank against possible default on the loan.  If you default on the loan, you give up your rights to the collateral and the Bank may seek legal actions to collect the collateral in the hopes of selling those assets to repay the debt.  Some Banks may accept a Personal Guarantee from another party as additional collateral.  When someone other than the original borrower offers a Personal Guarantee they will also undergo a credit review.


As a borrower you will need to be able to tell the Bank what the loan proceeds will be used for.  In addition you need to know and be able to tell the Bank how your business will be affected by the economy, both locally and nationally as it relates to your business.  A few good questions to know are: 1) are you a new competitor to the market?  2) What makes your business better or different from the rest of the competition?  3) If the economy softens, how will you manage the income and expenses to keep the business going.


Character can simply be described as your reputation, your trustworthiness and your credentials in the local community.  Are you responsible and do you take care of your obligations and debts?  What is your education and experience in the business that you are wanting to borrow the money for? Do you have
good references?


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