Lending Criteria

Lenders typically use five criteria when evaluating your credit history to determine whether they will lend to you. The “Five C’s of Credit” are:

• Capacity;
• Capital;
• Collateral;
• Credit; and
• Character.

Capacity
According to the creditor’s standards, are you qualified to receive the line of credit or loan that you want? Do you have the background, history, experience and expertise to continue with the project? Does your track record in business or in paying your bills indicate that you will come through?

Your employment also plays a factor. How long have you been employed at your job, and what type of job do you have? For creditors, certain types of employment are viewed more favorably than others. Most occupations fall into these categories, and are viewed from most desirable to least:

• Professional (doctor, lawyer, tenured college professor, head of company);
• Managerial;
• Self-employed (artists);
• Clerical; and
• Manual labor.

Capital
Have you contributed or committed enough of your own resources to the venture to ensure you will see the endeavor through? Have you put down a sufficient down payment on the property? Are you willing to put up the equity in your own home to cover a business loan?

Collateral
Lenders want to know what tangible assets you have (job, money in the bank, house, car, etc.). If you receive a loan, these assets will secure the loan. In other words, the lender can claim ownership of your assets in the event that you default on the loan. Your home or building becomes the collateral, with mortgages, and will be sold if you default. For other types of credit, such as credit cards or auto loans, your job is used to indicate your ability to pay back the lender.

Credit
Here, the lender reviews your credit reports and track record in borrowing and repaying debts. If you have had problems, be upfront about them, and prepare explanations. Creditors might request a letter and supporting documentation that explains how you have remedied credit issues.

Character
This is where the creditor’s subjectivity plays a role in their decision-making, and where you must sell yourself. Impress the lender, and you might receive more than your credit, collateral and capital would otherwise warrant. If the lender finds you questionable, you might lose the loan altogether.

Creditors will evaluate your present situation and decide if you can make mortgage payments on a timely basis, even if you've got a history of financial instability. The creditor's confidence in your organization’s ability to sell your products (sculptures, musical scores, theater tickets, etc.) and/or accomplish its mission is very important. Can you demonstrate that, despite past hardships, you have always handled yourself responsibly, and with integrity and professionalism?

Getting Credit Ready
If you hope to purchase a property or obtain a new lease, start reviewing your credit at least six months to a year in advance. Start by pulling a credit report from the three primary bureaus, which will give you sufficient time to correct mistakes and to rectify any problems. Being proactive and “cleaning” up your report will also help to increase your score.