Brian Tracy breaks down the five Cs banks use to evaluate loans: Collateral, Character, Credit rating, Capital, and Confidence. A bank once demanded 500% collateral, and a single late credit-card payment nearly killed his mortgage application. Banks want to see personal investment and a track record of trust.
500% collateral coverage — $5 of assets for every $1 requested.
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There are five factors that banks look for before making a loan to you or to any business person. These are called the five Cs of lending or borrowing. You must be prepared to demonstrate all five when you approach a bank for a loan. They won't tell you that they're using these five Cs to make a decision, but you'll have to know what they are or they will simply decline your application. First, banks look for collateral. What assets are you going to put up to cover the loan? Collateral is something that the bank can sell for cash fairly quickly to repay itself in case your business is not successful. When I first applied for a business loan and my business was fairly successful, they wanted 500% collateral coverage for every dollar that I was asking them to lend me for a line of credit. They wanted to prove that I could sign over to them $5 that they could seize and sell in a bonus sale, a rush sale, in order to cover their money. Without $5 of coverage, they wouldn't lend me any money at all. I was still shocked about that. Second, banks look for character. What is your previous track record with regard to loans? What kind of character do you have in terms of honesty and dependability? Who knows you? Who will vouch for you? When I applied for a bank loan, it turned out that I had gone to Hawaii for four weeks some years before. Just after I left For Hawaii, the MasterCard bill arrived and it sat there for a month until I got back and paid the bill. This MasterCard deviation was put onto my permanent credit record. And when I went to apply for a mortgage for my house, this bill, which was only for a few dollars, showed up as a black mark on the X ray and they declined my mortgage application as a bad credit risk. I still remember that. That's why it is so important that you keep your credit impeccable. One Bad credit experience can put a black mark on on your credit rating and undermine the quality of your character in the eyes of the banker. The third thing that banks look for is your current credit rating. How much money have you borrowed and repaid in the past? How good is your credit history today? As we just talked about, your credit rating is a very precious thing that follows you wherever you go. People with a good credit rating can often borrow all the money they want. Benjamin Franklin once said that cash is money and credit is money and a person with great credit can have all the money of the friends and people around him. Never forget that. The fourth C is banks want to know the amount of capital you have how much of your own money are you willing to invest? This is often called hurting money. How much of your own hurting money are you willing to put into the deal? This is a measure of how deeply committed you are to the success of the enterprise. Some years ago, I listened to a business professor who said, never invest your own money in your new business. Always insist that the bank provide you with the money. And I thought to myself, what a complete idiot. This person has never borrowed money from a bank to start a business, and he's giving advice to young entrepreneurs that is a hundred and eighty degrees off of what the truth is. The bank will want to know that you have put your whole heart and every penny you own into the business before they will lend you their money. The last factor that banks use to determine whether to lend you money is their level of confidence in you. In the final analysis, the individual banker must have confidence that you are the kind of person who's going to succeed in the business that he or she is lending you money to start or build. Borrowing money from banks is a progressive series of financial transactions that develop over time. When you first attempt to borrow money, as I said, most banks will want $5 worth of collateral, personal investments and other assets for every $1 they will lend you. They will also want personal guarantees from you and your spouse and your children that that extend beyond bankruptcy should you declare it. But after a bank has several years of experience with you and comes to know you and trust you, its lending requirements will decline step by step. I hope you enjoyed this video. If you did, please subscribe to my channel by clicking on the button that appears on the screen.
