Bankers used to say they relied on the “Three Cs” – Character, Cash, and Collateral. In the old days of banking when it was a much more personal process, character stood for a lot when you were being approved for a loan. Nowadays your credit score is the real mitigating factor between approval and not being approved.
A credit score (or FICO) is a number that is crunched out of your credit report and a series of weighted averages and factors. Basically, it serves as a rough and ready guide to how likely the person is going to pay off the loan. [see FICO score]

Cash is self-explanatory. If a person has $1 million in cash on deposit at the bank and wants to borrow $10,000, his or her chances of getting their loan approved are very very good.

Collateral is what a person puts up that the bank can sell if they do not pay the loan in full. Part of the reason most people can get a home loan is that the house serves as the collateral. If you don’t pay off the loan then the bank sells the house.

Banks and credit unions are an OK place to look for money if you are broke and need money in a hurry because that’s not the business the most banks are in. If you think back to the three factors on which banks lend: credit scores, collateral, and cash – lending from a bank is really only easy and fast if you have all of those three working for you to some degree.

The trick with bank financing is to line it up when your financial life is in good shape. If you know you’re going to be laid off and you think you’ll need cash. Arrange the home equity line well you still got a job and life is good.

“Banks are like an umbrella company that won’t sell umbrellas when it rains.”

As long as your credit score is high and you have some cash flow, a job and some collateral, banks will probably lend. That leaves out many of the people who are reading this and need cash quickly.

Banks and credit unions used to be more willing and responsive to the small lender who just need to borrow a small amount of cash quickly. Now banks want to be certain the loan will be paid for out of existing cash flow. First, the cash flow numbers must tell the banker that the person has enough money coming in so he or she can pay off the loan.

Second, the credit score has to tell the banker the person is willing to pay off the loan. Banks drive down the road using the rear-view mirror. If the person has generated sufficient cash in the past and pay their bills on time than the bank and credit union assumes they will in the future.

The problem with this, for people who need to raise cash quickly, is that something may have changed that affects one of the factors. Also, people, such as the self-employed, do not fit easily into banking categories so it’s harder for them to borrow money. In addition, people without good credit histories are at a huge disadvantage.

Credit histories are routinely checked for areas where they arguably have little value such as job applications and insurance. The relationship seems pretty tenuous between paying bills on time and driving safely, but nonetheless, insurance companies are beginning to rely more or more a credit scores.

The last factor of collateral presents a challenge for both the person in need of quick cash and the bank or credit union. A couple in need of money may rightly observe that they have a house worth $100,000 and a car worth $3000, but they can’t get the bank to loan them a thousand dollars to remove the tree roots that are closing up their sewers.

Their loan may have to come from the person doing the sewer work because he or she knows that they will have a lien on the house for the work so they may be willing to take a chance on the person paying because they are covered by the lien.

But the bank or credit union would look at that situation and apply the “three C analysis”. If the person was employed and his or her credit score was okay, the bank or credit union might lend the money as an unsecured loan. That means the bank does not have any collateral it can sell if the borrower doesn’t pay.

Basically they are betting that based on the credit score (history of paying in the past) and cash flow (how much money they have made) that they will get paid without resorting to collateral. This is the business the banks and credit unions like to be in.

Here Is The Cash-Flow Rub

If the person owns their own house, has a car as noted above, it has no source of income, then the bank or credit union will be a lot less enthused about lending the money. Even if the person has a house worth a lot of money and a car worth a lot of money, the bank does not want to have to take these assets and sell them to recover their advance.

Some lending institutions are, however, collateral lenders. The classic example of a collateral lender is a pawn shop. If a person has a Rolex watch worth $10,000, the bank wouldn’t care if the person came in and handed it to the loan officer and said, is worth $10,000 you can sell it in a week if I don’t pay you back. [pawn shops are discussed in other areas of CLF]

Many different factors influence a person’s chances of getting alone. As noted, the major factors with the bank, credit union, or finance company will be the credit score, cash flow, and collateral puts up for the loan.