Underwriting 101 - Character
Lenders evaluate the character of the guarantors of the loan (usually anyone owning 20% or more of the operating company) to try to determine how willing they will be to repay the loan, if they have a sense of responsibility for their obligations and if they have demonstrated responsibility for their debts in the past. Lenders also want to see that the operating company is under strong and experienced management with a good reputation in the industry and community. They want assurances that the operating company is currently being well managed in a legal and ethical manner.
Every lender has their own unique way of evaluating character. Some other considerations in evaluating character might include: the experience and ability of secondary managers and other key employees; availability of replacement management; availability of management resources; and the complexity of management duties.
In assessing management ability, generally a lender will examine certain key areas:
- Industry experience.
- Direct experience with the operating company.
- Past management history.
- Experience managing a similar business.
- Educational background.
Lenders will also examine credit scores and look for the presence of any derogatory information on the report, including: judgments; liens; suits; late payments; etc. Lenders might also check public records.