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The Role an Appraisal Plays in the Eyes of Lenders

February 16, 2011

Most would-be borrowers probably aren’t aware of how important an appraisal is when they’re seeking a loan. When determining if a business is a good investment risk, lenders will often examine the so-called “Five Cs of Lending.” These five Cs are:

1. Character – Is the business trustworthy? The business’s financial performance, credit report, management, and payment trends are examined.

2. Capital/Capitalization – What is the financial position of the business? This category includes resources, fixed assets, net worth, and the owner’s equity.

3. Capacity/Cash Flow – Does the business have funds available to repay the loan? This takes into account whether or not the borrower can continue to pay for all other business expenses, personal needs, etc.

4. Collateral – Does the business have assets that can be used as security should the loan default?

5. Conditions – What are the external market factors, including competition and market trends?

Even in today’s tight economic environment, lenders backed by the SBA are lending money, but they are increasingly more cautious. They are conducting more careful due diligence, which includes their own certified appraisals of collateral to ensure that they will recoup their losses should a loan default.

Having all the Cs covered – including having a defensible, impartial asset appraisal in hand – prior to seeking a loan can help increase the chances of being approved. Or, if there are some areas where a business may be weak in the eyes of lenders, a business owner can use this information to make changes and improve potential borrowing success. Understanding what lenders are looking for and how a certified appraisal fits into lending criteria can help business owners find the funds they need to grow.

The NEBB Institute endorses and strives to observe the highest standards of professional ethics to preserve the public trust inherent in the professional appraisal practice. The Institute provides initial and monthly comprehensive education, ongoing support, and a dynamic international network, and certifies professionals in the art of machinery/equipment appraisal and brokerage.

By: NEBB Institute

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