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Starting a Business

A Question Of Character

The fifth C is sometimes the most important.
Magazine Contributor
2 min read

This story appears in the August 2000 issue of Entrepreneur. Subscribe »

Q: For many years, I have heard of lenders relying on character as one of their criteria for making or declining loans. Can you tell me what is meant by character lending?

A: When the late American industrialist J.P. Morgan was asked what he considered the best bank collateral, he responded with a single word: "character." I agree with Mr. Morgan and add that character is who you are when no one else is looking.

From the lender's perspective, the questions of character are: Who are you? How do you pay your bills? What do your customers, suppliers, employees, community leaders and friends say about you when called on as references, and last but not least, what is my gut feeling about you?

Lenders generally analyze deals and approve or decline loans based on what are called the five Cs of credit: capital, collateral, conditions, capacity and character. As important as the first four Cs are in judging borrowers' requests, the issue of character can often be the overriding factor in a lender's decisions to make a loan. The lender will usually shake your hand, look you in the eye, sit down across the table from you and do a gut check regarding his or her comfort level with you as a borrower. If the words "bad risk" or "bankruptcy bound" are the first to pop into the lender's mind, you're not getting cash no matter how high your other Cs score.

It's true that character is a subjective judgment, but lenders put their character, in a sense, on the line every day. They balance their desire to help the borrowers with their responsibility to make the best loan decision with the least amount of risk to their employers. It's rare that I don't know within five minutes whether a borrower has character worthy of going to bat for. When you are not meeting your lender's standards of collateral, conditions, capacity and credit, your lender's positive judgment of your character can often tip the scales.

In the end, when everything else is stripped away, all you have is your name. And that can be your most valuable asset.

Doug Hood is co-founder of Rainmarker Capital Corp., a capital-acquisition consulting company in Cartersville, Georgia. Co-founder Marilea S. Hood also contributes to this column. Send questions or personal anecdotes to

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