The Secret Sauce to Bank Loan Approval

Welcome back to my channel. My name is Mundo. And today we're going to talk about the secret sauce of bank underwriting. Have you ever tried deciphering the questions that you're getting from your banker about your business? What if I told you there was actually a formula they are using to give you loan approval? If you want to crack the code of bank underwriting, you must know the framework of the five Cs. So what are the five Cs? Five Cs are character concepts, capacity, capital, collateral and conditions. And today we're going to dive into all five. Understanding this framework is like having a treasure map to the complex journey of bank underwriting, guiding you through the twists and turns towards the path of loan approval. Today we're going to go over all five of those. The risk management framework known as the five Cs of credit is really the magic behind the curtain. So diving right into that, the first one being character. This is oftentimes the gatekeeper to credit approval. Bank is not going to make a decision based on your character alone. They're obviously going to be looking at your financial statements and a large part of the loan approval process is going to be predicated based on your financial performance and stability. However, if your character is not great, they are not even going to entertain the option of giving you loan approval. What they're looking for here is your track record of success. They're looking at your reputation, they're looking at your credibility. Do you have a strong brand name in the industry or a strong local presence? These are questions that they are going to be answering. And if you have a strong brand name, your chance of success are going to be pretty high in this category. Having a strong brand name and reputation in this category is going to go a long way. Capacity. This assesses your overall ability to repay a loan by looking at your financial stability through various debt and liquidity ratios. A large ratio that banks typically look at almost always is going to be your debt service coverage ratio, which looks at your ability to service debt payments. Capital. This can be thought of as your overall financial strength. What proportion of funding comes from debt versus equity? This is a question that your bank is going to be asking in this category. How much skin in the game do you have in this business? Have you just leveraged this entire business model to get to where you're at now or have you put in a substantial amount of your own personal money? The bank is going to look more favorably and see you as a less risk of an investment if you have your own money invested in the business. What is easier to walk away? Something where you have a ton of money or something where you've put no money into you? Do the math. Collateral Are you offering up any asset or property to secure a loan? Banks love giving asset backed loans. They want to know what security you have available. So if you stop paying the loan, they have recourse against you and they're going to seize whatever collateral you're providing to them to liquidate and get their investment back. Conditions this considers the terms of the loan and how external factors may affect your ability to repay. This may be looking at your particular industry. Are you currently in a down cycle? What does the next 12 to 24 months look like in your sector? These are the questions that your bank is likely going to be asking here. How is the economy doing? Credit will tighten in a bad market, right? That is no secret. And that is what the banks are going to be asking themselves here. So how can we tie all this together now that we understand the 5 C's of credit? Strength in one category can often offset weaker performance in other categories. And not all the banks are the same. That's why it's important to build relationships with your local bank. They all have different weighting scales towards one versus another. One bank may be okay with you not offering a lot of collateral for loans. They may give you a bunch of credit if you are in a heavy cash position or you have a really, really strong background and track record. They may overlook one category versus the other, but you take a different borrower who has a completely different background and character. They may be underwriting them differently. So it really is all based upon the individual and the company and each company is looked at differently. But generally speaking, the banks are all operating off of this risk management framework. Do you want to increase your success towards getting a loan? How about you flip the script and look at yourself and your company from the lens of a bank? Now that you know this framework and ask yourself this question. How would you grade yourself? I hope you enjoyed today's video and found a ton of value from this content. If you did, do me a favor, go ahead and like and subscribe below. 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