Returning to Credit Basics (Last but not least): Character

In the final installment in the series, I would like to focus on character.

Any financial institution worth their weight in salt weighs very heavily on this criterion. It is the most important part of our underwriting process.

In my opinion, what good is it to have a collateral analysis that says you are fully collateralized and what good are financials, if you are dealing with a customer who is unethical and immoral?

The hardest part of this criteria is how to assess it and measure it. It can be partly fact-based and partly a gut feeling. A fact-based assessment involves reviewing credit reports, financial statements and other pertinent third-party you records in conjunction with a personal visit or interview.

It is during this personal interview or visit that you begin to develop and intangible gut feel. 

As I walk into a customer's office, here are some of the things I notice:

• Is the office clean and professional?
• Does this customer take care of their equipment? Are there parts lying throughout the yard?
• Does the customer, avoid eye contact?
• How was the handshake?
• Is the customer aware of their business?
• Do they understand their financial situation?
• With a cooperative with any previous financial institutions during previous distressed periods?

It is not only important the customer has paid his bills in the past but, have they been proactive in communicating any current problems?

This is especially important after booking the transaction. We continue to monitor the customer's character throughout the life of the loan or lease. 

Quite often open communication can avert a default or repossession. Remember your financial institution wants to recover their collateral less than you would like to lose it. 

Here are some of the questions that I ask is a life of the lease when determining a company or person's character:

• Has the customer been proactive in communicating with us?
• Did the customer wait until there was already a default situation for communicating with us?
• Has the customer communicated any changes in business models, management staff, financial situations or changes in current market conditions?
• Is the customer using the collateral in conjunction with the financial institutions guidelines?

In summation of this series, it's important to know how you are viewed by your financial institution and it is extremely important that you develop an open line of communication with each other. When reviewing your application for credit, remember some of the things that an analyst will be reviewing. Understanding these can be the difference between a credit approval and a decline.

In review here are some of the guidelines used while a lender is reviewing your application for credit:

• Cash Flow - Will this asset be able to pay for itself and contribute to the profitability of your company?
• Collateral - Is there enough value in the collateral to cover any losses in the event of a default?
• Capital - Do you have enough “skin in the game?”
• Conditions - are the current market conditions favorable to your business model and to those of your financial institution?
• Character - Would you do business with yourself?

I hope that you found the series informative and enlightening. It is been beneficial for me to review these 5 C’s credit again and I hope that it has assisted you in looking at things through the eyes of your financial institution.

Until next time; thanks for the support.

John