The 3 C’s of Lending

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What does a lender look for when you submit a loan application?

The short answer is they look over hundreds of variables when you submit your application, and each lender has their own unique guidelines. However, at a macro-level there are only three things that you need to be concerned with…

  • Cash flow
  • Credit
  • and Collateral

Let’s go over them in detail one by one….

Cash Flow

What is cash flow

It’s basically how much money do you have left over in order to repay that loan.

Here’s an example:

Say you’re the one with all the money and you’re the one that’s going to make a loan. Your neighbor asked you for $1,000 loan. The first question you’re going to ask him is “Hey neighbor how are you going to pay this back?”

  • Are you employed
  • Are you not employed
  • Where are you getting your money from
  • Do you have a side hustle
  • And how much do you have left over at the end of the month in order to repay the loan…

–Let’s say he’s got $200 left over

—-It’ll take them 5 months to repay the loan

–Now let’s say he has $500 left over

—-Now it’s only going to take him 2 months to repay your loan

In the second case you’re exposed to less risk, so you’re more likely to lend him if he’s got $500 left over. It’s no different on business lending side, so what happens is when the underwriter gets your app, they’re going to look at..

  • Your sales
  • All your expenses
  • Your net operating income

Then they’re going to come up with what’s called a debt service coverage ratio and higher this debt service coverage ratio is, the more cash flow you have the less risky you are, and the more likelihood of you getting your loan approved.


the most important C out of the three C's

Credit is nothing more than how fiscally responsible you have been on a historic basis…or in plain English… it’s nothing more than how timely you pay her bills and how responsible you are.

Let’s go back to your neighbors case where he’s asking for a $1,000 loan from you, what you’re going to do is approach your other neighbor across the street and do a reference check, and if the other neighbor across the street says “Man watch out for that dude! He borrowed a thousand bucks for me three weeks ago, and that’s never heard from him since!”.

In this scenario he’s got bad credit and you’re likely not going to lend him. It’s no different on the business lending side, they’re going to look at your credit history, and there’s a bunch of different business credit bureaus where they could inquire.


So let’s suppose your neighbor that’s going to borrow $1,000 from you doesn’t have good credit and he doesn’t have a job right now but he is one to sweeten the pot… he has a classic Camaro big block and this car is worth $5,000 on a fire sale basis, so you could list it for sale right now for $5,000 you would have people bidding on it. He says “I will give you the title to my classic 1969 Camaro if you lend me $1,000 in liquid Capital, if I don’t pay it back you can take my Camaro, and sell it and recoup your $1,000 and some more.”

The addition of the Camaro as collateral lowers your risk, and you’re more likely to lend to him. On the business side it’s no different, you can collateralize…

  • Real Estate
  • Receivables
  • Inventory
  • or even Equipment

The great thing about collateral for a business loan is that you get the benefit of the use of that equipment, if you collateralize it a real estate the lender is not going to physically take possession of it.  Where as in the example with your neighbor, you might take that Camaro and put it in your garage because you don’t know if he’s going to wreck it.

The stronger you are and each one of these departments (Cash flow, Credit Collateral) the more likely you are to get approved for any business loan that you want.

Watch the video now: The 3 C's of Lending

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