Summer time..., moment to relax, enjoying the views from a sunny terrace and sipping a refreshing drink... yes, is time for C.A.M.P.A.R.I. These letters summarize what you have to remember next time you are lending to somebody, anybody...

Character

Who are you lending to? What is their history? Are they good at what they do? Are there areas of weakness? By asking detailed questions of the borrower one can establish if they are of good character. Bad character traits would be a poor credit history, no experience in the sector in which they are operating, not being qualified for the job they are doing, and so on.

Ability

Can the borrower afford to repay or refinance the loan over the period they are asking to borrow for? For this one can look at bank accounts, the business financial accounts, forecasts and projections. Questions such as “who produced the information?” are also valid, as a business plan written by a reputable firm of accountants carries more credence than one that isn’t. This also includes the ability of the owners and their capacity to run the business properly.

Margin / Means

First Margin. Very simply, how much interest income do you want to make? For lower risk, such as a 60% mortgage, the margins will be small as the risk is lower due to the level of equity in the property being funded. For higher risk, the margins are higher to compensate for the greater risk of loss. Secondly Means, or the proper resources and operations to run the business that can safely create enough returns to comfortably pay the interest.

Purpose

What is the loan for and does this fit with the nature of the borrower? For example, a fish and chip shop wanting to borrow money to buy a new deep fryer would be an acceptable purpose. The same shop wanting to buy a knitting machine wouldn’t.

Amount

Size really does matter. The more money someone borrows, the higher the risk. The amount also has to be compared against the apparent value or wealth of the borrower. Banks are happy to lend several million pounds to large companies, as the borrowers have the assets to support the loan. The average man in the street won’t get a loan of this size because he hasn’t got the assets or the ability to repay.

Repayment

How will your loan get repaid? Getting some of your capital back each month reduces your risk of loss. Full repayment over 3 years is less risky than full repayment over 25 years, as there is less time for things to go wrong and the borrower default. If the borrower does default, how do you get your money back?

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