Long ago when I started my first job in a bank I was taught that three C's were central to assessing a borrower. Character, Credit and Cash. You may quibble why would a guy who already has Cash borrow from a bank? It is not as dumb as it appears at first glance.
"Character" is an obvious one, isn't it? I wouldn't lend to men of bad character. In those days men of "good character" did not throw their money after fast women and slow horses. They just gritted their teeth through bad times, and tightened their belts. They did not renege on their promises. Nor did they jump ship and swim for the shore at the first hint of trouble - they stayed on board and were the last to abandon ship or sank with it. They also did not ring fence their private assets so as to defeat creditors and bankers should their business go belly up.
Today there are hundreds of examples of businessmen doing well for themselves even as their businesses are floundering. Newspaper headlines are full of them.The government facilitated this with an act that wrung concessions from lenders, creditors and even employees so as to put the business back on its feet; when the business' health was restored, it is handed right back to the people who ran it to the ground in the first place, thus paving the way for Rescue Act II.
The second C, "Credit", is quite vague. A person must be credit worthy in order to get credit. Does getting credit make him creditworthy or does being creditworthy get him credit? In the olden days it clearly meant those who had the assets but not the liquidity. The assumption was that a man with assets will not default on his commitments to repay. Something like saying a person is solvent, but not liquid.
"Creditworthiness" and "Collateral" were used interchangeably until the latter was declared antisocial by the socialist brigade. This brigade had invented the self-serving and politically-driven banking practices which were apparently designed to stop the rich monopolizing the limited credit available in the economy. The new practice actually created many credit monsters who knew how to play the system - monsters without even the most basic business scruples. Collateral and "creditworthiness" overnight became dirty words and could halt your upward progress in your banking career.
Now we come to the third requisite, "Cash". So the basic question: why would someone with cash want to borrow more cash? For the reason that it is cheaper to use borrowed cash than your own. A bit of leverage improves your RoI, says finance theory. It may make your business more risky, but it improves returns to the shareholders. Since the shareholders have already risked their capital by investing it in a business, why not take a whole lot more risk in order to get greater returns? After all the additional risk is taken not with their own money but with the Bankers' money.
For the record, the third C of the "three Cs theory of lending" referred to the business' ability to generate cash; not to its already existing cash hoard but to the business' future Cash Flows.
Why this primer on bank lending? I was reminded of it by what happened recently.
Yesterday I was at a wedding. I heard one wag propound his "Three Cs theory of Marriages". According to him the aspiring bride should be able to Cook, Clean and Conceive.
It is comforting to know that traditional values have not been forgotten.
"Character" is an obvious one, isn't it? I wouldn't lend to men of bad character. In those days men of "good character" did not throw their money after fast women and slow horses. They just gritted their teeth through bad times, and tightened their belts. They did not renege on their promises. Nor did they jump ship and swim for the shore at the first hint of trouble - they stayed on board and were the last to abandon ship or sank with it. They also did not ring fence their private assets so as to defeat creditors and bankers should their business go belly up.
Today there are hundreds of examples of businessmen doing well for themselves even as their businesses are floundering. Newspaper headlines are full of them.The government facilitated this with an act that wrung concessions from lenders, creditors and even employees so as to put the business back on its feet; when the business' health was restored, it is handed right back to the people who ran it to the ground in the first place, thus paving the way for Rescue Act II.
The second C, "Credit", is quite vague. A person must be credit worthy in order to get credit. Does getting credit make him creditworthy or does being creditworthy get him credit? In the olden days it clearly meant those who had the assets but not the liquidity. The assumption was that a man with assets will not default on his commitments to repay. Something like saying a person is solvent, but not liquid.
"Creditworthiness" and "Collateral" were used interchangeably until the latter was declared antisocial by the socialist brigade. This brigade had invented the self-serving and politically-driven banking practices which were apparently designed to stop the rich monopolizing the limited credit available in the economy. The new practice actually created many credit monsters who knew how to play the system - monsters without even the most basic business scruples. Collateral and "creditworthiness" overnight became dirty words and could halt your upward progress in your banking career.
Now we come to the third requisite, "Cash". So the basic question: why would someone with cash want to borrow more cash? For the reason that it is cheaper to use borrowed cash than your own. A bit of leverage improves your RoI, says finance theory. It may make your business more risky, but it improves returns to the shareholders. Since the shareholders have already risked their capital by investing it in a business, why not take a whole lot more risk in order to get greater returns? After all the additional risk is taken not with their own money but with the Bankers' money.
For the record, the third C of the "three Cs theory of lending" referred to the business' ability to generate cash; not to its already existing cash hoard but to the business' future Cash Flows.
Why this primer on bank lending? I was reminded of it by what happened recently.
Yesterday I was at a wedding. I heard one wag propound his "Three Cs theory of Marriages". According to him the aspiring bride should be able to Cook, Clean and Conceive.
It is comforting to know that traditional values have not been forgotten.
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