The 5 Cs of Acquiring Money
Lenders look for the 5 Cs in order to approve loans and mortgages. How does the average person qualify for a loan? The secret is in understanding what are the 5 Cs. The Five Cs that make financing easy are: Capacity, Capital, Credibility, Collateral, and Character.
C1 - Capacity. The most critical element to getting financing is Capacity. Capacity is the ability to service/pay the debt. This is based purely on income. The more income an individual makes the more capable he is to service loans. An example: a person earning $25,000.00/yr may qualify for a loan of $A. Another person earning $50,000.00/yr would qualify for a loan of 2 x $A. The bigger the income, the more capacity you have to service a bigger debt. Remember that the more income you show the more capacity you have to borrow.
C2 - Capital. The importance of capital is to show the lender that you have skin in the game; in our last article, we touched on this term. Capital is money. However, the way the lenders use the word capital is in terms of participation. Capital is the participation in the loan of a home by way of a down payment. The more participation, the more comfortable the lender will be to work with borrowers. Lenders want to lend money, so if a borrower comes to the table with money to participate, this would satisfy the lender because the borrower is seen as assuming risk also.
C3 - Credibility. This is the cornerstone of every relationship. Having a reputation for keeping one’s word shows credibility. Lenders are looking for credibility; one way in evaluating this is repayment history. The better a borrower is in paying their bills on time, the better the credit will reflect. This is what is called a credit report, such as in an Equifax or TransUnion report. Credibility can be overlooked by the other Cs, however, it is one of the most important in getting a loan.
C4 - Collateral. Collateral is the security of your mortgage. Collateral can be seen as a backup if the mortgage defaults. A house (aka the collateral) can be sold to pay off the mortgage. Collateral is used to bring security to the investment so money isn’t lost for the lender.
C5 - Character. The final touch. Character is the image of the person; their income stability, their saving habits, and the overall responsibility of credit utilization. Character plays a big part in the process to bring trustworthiness to lend money. Those who have a big capacity saved up enough capital, and are credible for repaying their loans are seen as having great Character in the lender’s eyes.
Conclusion - The 5 Cs of Financing are Capacity, Capital, Credibility, Collateral, and Character. These 5 Cs will provide confidence in the lender to loan out money. This money when borrowed and invested properly will generate wealth to fund the next great idea for the future.