Commercial LoanIn any significant commercial loan transaction, the loan officer is required to write up a loan presentation to explain to the customer, the customer’s needs and the ways in which the applicant will be able to repay the loan.  Loan officers are trained to consider and present to the loan committee or their senior credit officers, their evaluation of the four C’s.  In order to make a successful application for commercial credit, you need to know what the four C’s are and understand what they mean.

They are:

• Character
• Credit
• Collateral
• Cash Flow

Although the application and more importantly the loan presentation must show satisfactory information on all of them, the most important of the C’s in the final analysis is Cash Flow.

Presentation of adequate Cash Flow to pay the debt is critical in the application and credit presentation write up.  The cash flow numbers are always more credible if they are derived from CPA prepared financial statements.  One of the elements that an applicant cannot afford to skimp on is the use of a well reputed CPA to prepare the financials.  However, the financials need to reflect real cash flow and not be in the standard form that is constructed to reduce income taxes.  What you are trying to show is ability to repay the loan.  Depreciation and other non-cash tax deduction items need to be stated separately from cash flow statements.

There are two main parts to every loan application:

1. The narrative explanation of the business including

a. the product
b. the market
c. the competition
d. the trends

2. The financials.

What many borrowers do not do well is sell themselves and their business to the lender.  The first thing a loan applicant has to do is convince the frontline loan officer that the applicant has a good business and that the owners and managers of the business are more than just lucky.  They know what they are doing and what the market forces are doing or going to do to or for them.  The applicant must explain why the business is going to continue to be successful.  The application needs to tell the story in an interesting and informative way that emphasizes the good and deals with the obstacles and risks faced by the business.  Remember that the loan officer, if he or she is going to move the application forward is going to have to do a write-up.  If the applicant is able to provide a professional explanation of the business, including the product, the market, the competition and the trends, the chance of obtaining the loan is significantly enhanced and the loan officer may well plagiarize the application in preparing the write-up.  If the applicant includes a good narrative with the application, the application does not depend so much on the ability or lack thereof of the loan officer to paint the picture you want the loan committee or senior credit officer to see.


Character is the first of the Cs’ we listed.  Character is really a combination of reputation and communication. Does the applicant appear to be honest?  Is the client reasonable to deal with?  There is no room for grandstanding, white belts, white shoes and gold chains in the loan office.  Consider inviting your CPA to attend one of the initial meetings with the loan officer.  The natural process that often occurs when the CPA is in the important meetings with the bank is that it leads the banker to feel, without expressing it, that this CPA won’t let his or her client do anything stupid “so I (the banker) don’t have to worry.”  Character is established.

Credit Rating

Credit Rating is the Second C.  Stay on top of your bills so that credit ratings are not unnecessarily damaged by carelessness or ignorance.  Credit ratings are checked regularly and there is a component of credit rating internal to the relationship that needs to be managed.  For most credit in amounts of over $1 million there will be financial covenants.  Make sure that you understand the covenants very well.  Your CPA or your attorney can and in most cases should assist you in obtaining a clear understanding of the financial covenants.


Collateral is the third C in our list of primary considerations of the lender in the decision making process.  In many loans where Real Estate is not part of the collateral equation or is only secondary, inventory, accounts receivable and sometimes intellectual property become the primary source of collateralization.  In the application process, a realistic view of expected loan to value ratios is very important.  It used to be that loan to value ratios were in the area of 70 and even 80% for both inventory and accounts receivable.  In today’s world, it is common for banks to set those ratios at or below 50% for inventory and not much higher for receivables. Having a realistic view of what to expect with regard to the amount of funds that will be available can make a significant difference in all aspects of the credit relationship.  Management of collateral is another way that you can improve your relationship with the bank before and after the loan is funded.  Be aware of the dates upon which the ratios will be tested and manage those levels based upon those dates.

In conclusion, the two most important factors in your effort to improve your chances of obtaining the loan your company needs are 1) utilize your CPA, and 2) write a professional financial story of your business that shows how you came this far and why you will have continued success.  Don’t forget to include an understandable description of your market, your vision of the future and your understanding of your completion.

If you have further questions about Banking and/or lending, please call our office at 480-733-6800 and ask to speak with Ed Richardson. Ed is a well-rounded attorney with more than 40 years experience and expertise in business, real estate and lending transactions and litigation in Arizona law firms. He understands that excellent representation transcends documentation and pleadings and requires understanding of business fundamentals and individual client expertise, vision and objectives.