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The “X” Factor

Many lenders are looking at the risk and credit analysis and not the character behind it.

Agricultural lenders often rely on their past experiences of challenging economic times.  And when younger individuals enter the field, they depend on the perspectives of more experienced lenders as well.  During training, most new lenders are introduced to the five C’s of credit; cash flow, collateral, capital, conditions, and character, or what some call the “X” factor. 

 Today, the responsibilities of due diligence are  segmented between relationship officers, credit analysts, credit risk rating models, and credit scoring, The character element, or the people behind the credit are often minimized.  In fact, one lender recently commented that regulators and credit analysts are so focused on cash flow and numbers they are overlooking a vital part of the credit analysis, which, of course is character.  He added that in some cases, negative cash flows might be present for multiple years, but the customer finds a way to make payments and pay the bills.   Well, let’s examine some of the important attributes of character, or the “X” factor in many accounts.

 Especially during economic resets, it may be tempting to play the victim’s part in the “blame game,” but those with strong character accept responsibility.  For this type of producer, profit losses aren’t the weather’s fault or due to bad government policy.   They avoid the “pity pits” and instead honor their commitments even when circumstances change.  

 Further, customers that sacrifice in order to service debt and pay the bills exhibit exceptional character.  This sacrifice might take the form of skipping a vacation or keeping the car for a few more years.   These producers prioritize, follow through with a plan, and meet their obligations.

 Another important attribute of character is one’s willingness and openness to work with others.  This includes a working relationship with one’s lender, as well as the ability to accept counsel.   They make an effort to maintain working relations realizing they may be needed at some point in the future. 

 Next, honesty and integrity determine the way in which one values assets on the balance sheet.  Accurate values along with debt totals, accounts payable and other liabilities are crucial in building trust.

 Proactive communication is another important character attribute, especially when a problem arises.  In general, it seems that many producers that proactively communicate goals and numbers also steer clear of the undisciplined pursuit of more.  Often, they follow the H.U.T. principle; they hear, they understand, and they take action. 

 While this is not a comprehensive list, in situations with short cash flow and limited equity, a few positive attributes on the character side can build a case against a compromised credit score or model-rated risk because even sophisticated analysts cannot account for character in the numbers.

 P.S.  One telling attributes of character is how one has weathered adversity. Whether it’s a business or an individual, adversity can build character or tear it down.  It is always interesting to see how different personalities react during difficult times.

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