How does a lender assess your suitability?

US farming runs on debt – in 2020, $99 billion was lent in the agricultural sector.  How does a lender assess your suitability for a loan?


Character

This really comes down to credit scores and reference checks. For the bank, your character’s good if your credit score is high and your employment history checks out. But a bad credit score isn’t necessarily the end of the story. Lenders understand that sometimes life happens to you. Be ready to explain what you’ve gone through and any extenuating circumstances. Remember, banks want to lend because they make money doing it – help them lend to you by getting to know your lender and giving them the full story.


Capacity

Can you make the monthly principal and interest payments? Banks will assess your historical and projected cash flows to see if you’ve excess cash to pay off a new loan. They’ll also look at your Balance Sheet to understand your current loan liabilities. If you’re already borrowing a lot, they may not want to increase our debt load.


Capital

This one’s easy: the bank likes to see that you’ve invested your own money in your own business. The more you’ve put in, the more likely you are to work hard to make it work.


Collateral

Back to the Balance Sheet. The bank wants to understand your assets (what you own) because if things go wrong, they’ll take something from you and convert it into cash to repay themselves.


All those loan forms, yes, all those loan forms, are there to understand these four C’s. Knowing how a lender assesses your suitability for a loan gives you the inside track. If you really understand the 4 Cs yourself, feel facile with your cashflows and balance sheet and what they mean, can explain explain rough patches and show you’ve got some skin in the game, getting a loan should be easier.

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