My entire working career (over 5 decades) has been lending money. I’ve reviewed hundreds of thousands of loan applications and, as a commercial lender, I have loaned in excess of a billion dollars to individual and corporations.
I’ve made commercial loans as a banker, and as an asset based lender and as a hard-money lender.
That said, through “trial and error” I know when to hold’em, know when to fold’em and know when to walk away.
Hopefully, you can benefit from my experience as a lender.
As a lender, we think in terms of the 5 C’s to qualify a borrower for a commercial loan, as follows:
Capacity/cash flow: a lender wants to know if one has the “ability to repay” the loan. The best way to determine one’s “ability to repay” is to analyze their “residual income”. Residual income is defined as that portion of earnings that is left over after paying all other obligations. For example, let’s assume that a borrower’s monthly net income after federal income tax is $6,000.00 a month. From that one would deduct all monthly expenses such as car payments, credit card payments, student loan payments, residential mortgage or lease payments, monthly average for groceries, entertainment, utilities, medical expenses, etc. The amount that is left over is one’s “residual income”. Let’s assume that one’s residual income is $3,000.00. Hence, one would qualify for a loan payment of $3,000.00. A more conservative amount would be to limit one’s payment to no more than $2,700.00. The excess $300.00 a month is one’s cushion in the event of an unexpected expense.
Creditworthiness/credit score: high on a banker’s priority list is one’s credit score a/k/a FICO score. Generally, most banks require at least a 660 FICO score. Why is this important? Simply because; history has a habit of repeating itself. If one has not honored one’s obligation previously, chances are pretty good that one will not do so in the future. If you don’t know what your credit report says about you, order a copy at myfico.com. A hard-money lender will approve a loan to a borrower with bad credit but most banks will not. This is the primary difference between a bank loan and a commercial loan from a hard-money lender.
Character: a lender wants to know if you’re a responsible person. As a commercial and/or a residential hard money lender, one’s credit score is not that important. It does, however, matter if one is a charlatan. A hard money lender will overlook a borrower with slow credit but will not overlook one with a criminal background or one that has federal tax liens and/or judgments
Capital: a lender wants to know that their borrower has some “skin in the game”. One of the main reasons the nation experienced a complete collapse of the mortgage industry in the mid 80’ was the lack of a down payment. Historically it was common to put down 10-20 percent when one purchased a home. In the mid-80’s one could buy a home with zero down financing. That proved to be a disaster
Collateral: one can think of collateral as an alternative source of repayment in the event of a default. Moreover, if the borrower has made a significant down payment (say 30%) and something unforeseen happens, the borrower has enough equity in their property that then could sell the property and do so without harming their credit
Our business is making commercial and residential hard money loans. However, we also feel a responsibility to help those in need of a loan and we’re available (free of charge) to counsel anyone in need of a loan.
Jim Emerson