The Four C’s of Credit - Bank on it!

A.P. Giannini, the founder of Bank of America, started his bank out of frustration with the banking system of the day. Banks of his era typically only serviced the wealthy and ignored the common man. He launched the Bank of Italy in San Francisco (the precursor of the Bank of America) in 1904 as an institution for the “little fellows”. He would loan money to local immigrants not based on how much money they had but based on their individual character. The cut of their jib, so to speak. In today’s world we should be so lucky to fund a few A.P. Gianninis but banks today use a common benchmark to asses the credit worthiness of businesses seeking loans. These are the Four C’s of Business Credit also known as Character, Capacity, Capital and Conditions.

Character is the overall view of an individual or business’ financial history. In the credit world the banks are asking if the borrower is a solid citizen. Do they pay their debts on time? Do they have a significant credit history? What lines of credit does the borrower current carry? What is the total debt load the borrower is currently shouldering? Banks typically get the answers to these questions by running a credit report via multiple sources such as Transunion, Experian or Equifax for individuals and Dun and Bradstreet for businesses. These sources store, report and convert this data into a credit score also known as a FICO score for individuals and for corporate entities, the Dun and Bradstreet Commercial Credit score. The higher the score the better the chances that borrowers will procure the funds they need at acceptable terms. Lower scores, raise red flags to the banks and even if they were so inclined to offer a loan, due to the lower credit score, the terms of the loan might not be to the borrower’s liking.

Capacity is simply the ability of the business to generate profits significant enough to pay the money back! An established, money making venture usually has an easier time accessing capital due to their proven track record of turning a profit and paying their debts. Start-ups have a tougher time of it. They have no track record for the bank to rely on so in the bank’s eyes, the risk is greater. There is an old saying that banks only lend money to folks who don’t need it. When considering capacity this saying appears to be true.

Capital is not just what the business is trying to access, when applying for a business loan the bank reviews the capital of the business seeking a loan. Here the banks pour over the financial records of the business. They want to see cash flow, net worth, working capital, inventory, fixtures etc. There is even some cross pollination of the Four C’s as the credit report plays a part in reviewing capital as well.

Last, but not least, Conditions. Dun & Bradstreet Small Business Solutions defines conditions as “The external factors surrounding the business under consideration - influences such as market fluctuations, industry growth rate, political/ legislative factors, and currency rates.” In other words, would a bank readily extend credit to a business launching a new automobile factory in this economy? How about an export company when the current exchange rates would clearly cut into the profit margins. This big “C” leans less on the financial information of the company and more on the business plan and overall strategy of the business seeking financing.

So, the question arises. Which of the Big Four is the most important? There is no clear cut answer. All are important from the perspective of the lending institutions. More weight might be given to Character over Capacity for a start-up or Conditions might sway the bank’s committee over the other factors for a manufacturing company seeking funds to branch out into an untested market. Though banks might assign more weight to one factor over another, you can be sure that they take into consideration all of the Four C’s.

Good things come in Four’s. The Four Seasons or the Four Tops come to mind. A four- pack of yoghurt is a good thing. “Four score and seven years ago…” is a great way to start a memorable speech. The Four Horseman of the Apocalypse….Well, maybe not that one. How about the Four C’s of Business Credit? That’s a good thing in a “look at us, we find accessing capital fun and easy!” kind of way.