ss_blog_claim=bd50edc517cf0b7549fe6b5f63b6b5f8 The SLS Business Finance Blog: The 3 C's of Lending

Monday, February 16, 2009

The 3 C's of Lending

Bankers are taught these in credit training and everyone who is in any money lending business looks at the 3 C's. What are they? They are:

1) Credit
2) Cash Flow (as measured by Debt Coverage Ratio)
3) Collateral

What differs between lenders of all types (even successful ones in different areas) is how they analyze the C's, which they emphasize more and what risk they attach to each C.

Bankers often require having all 3 C's or at least 2 very strong (Credit and Cash Flow usually). What makes equipment leasing different is often strength in only one C can still mean getting a deal done to get a client the equipment they need.

For instance, I use a couple equipment leasing companies that care much more about the cash flow of the business OR the collateral (in this case the equipment being leased) than they care about the credit profile of the owners. This is especially helpful in an environment like we have now where nearly every one's credit profile looks a little worse now than it did a year or two ago.

One company I'm currently working with has a terrible credit history but has good cash flow in their business and their need is for manufacturing equipment that helps increase their output of product. This is an ideal case for us as a banker would never touch a credit profile like this but for us, they have 2 of the C's covered (Cash Flow and Collateral). Two C's means we can find a home for them to get this new equipment that they need.

Most everyone understands the idea of credit based lending and pricing since that's how mortgages are often priced so we'll focus the next couple entries on the other C's of Cash Flow and Collateral and how they play into approvals and pricing for equipment leases.

Southern Lending Solutions

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