The 4 C’s of Lending – The Private Credit Context

How Private Lenders Approach the 4 C’s of Lending Differently from Banks

Here’s something that might surprise most investors: when banks and private lenders talk about the “Four C’s of Lending,” they’re often speaking different languages entirely. While they use the same terms – Capacity, Collateral, Capital, and Character – their interpretation and application of these principles could not be more different.

Right from the beginning, across the many Borrowers and transactions we’ve evaluated at Bowery Capital, one thing has remained crystal clear: the rigid, checkbox approach of traditional banking simply doesn’t tell the whole story. Let’s walk through how private lenders, especially Bowery, see things differently, and why it matters for both investors and borrowers.

Capacity: Reading Between the Lines

It’s a common story: great borrowers with strong businesses get turned down by banks. Why? Because traditional banks typically reduce capacity assessment to a series of rigid formulas – standardised income multipliers, credit scores, and serviceability calculations that leave little room for nuance.

Take a recent example: a property developer’s bank application was rejected because their current income didn’t meet the standard multiplier requirements. But here’s what the bank missed: this developer had successfully completed five similar projects in the past three years, each delivering strong returns. Their capacity to repay wasn’t reflected in their current income statement, but their track record spoke volumes.

The Multi-Dimensional View

At Bowery, reading between the “capacity” lines reveals a much richer story. Think of it like reading a book – while banks might just read the cover and get turned off by the current numbers, private lenders read every chapter to understand the borrower’s true capacity to service and repay the loan.

Current Income Analysis

Sure, current income and expenses matter, but what matters more is understanding their context. A property development company might show lower income this quarter because they’re between project completions. Private lenders dig deeper into these scenarios where banks might simply decline based on current figures.

Additional Income Sources

Private lenders take a more comprehensive view of income sources. Does the borrower have other business interests or investments providing additional capacity? While banks might dismiss these as ‘non-core’ income, private lenders understand that all reliable income sources contribute to loan serviceability.

Asset Income Potential

The income-generating potential of the security property itself plays a crucial role in capacity assessment. While banks might solely focus on the borrower’s current income, private lenders evaluate how the property’s income potential supports loan serviceability. This might include upcoming lease renewals at market rates, potential for higher occupancy, or value-add opportunities that could increase other streams of income.

Collateral: Beyond the Valuation Report

When most banks think about collateral, they focus on the number at the bottom of the valuation report. But there’s a much richer story to tell. At Bowery, collateral is viewed as a dynamic asset with its own narrative and potential.

Security in Context

Properties aren’t just bricks and mortar – they’re living assets that respond to market forces, demographic shifts, and economic changes. Understanding this deeper context makes all the difference in assessing true security value.

Location and Market Dynamics

Take a recent Bowery project in Melbourne’s suburbs. On paper, the property’s value matched similar assets in outer areas. But its proximity to multiple transport links, growing demographic shifts, and future infrastructure projects told a much more compelling story. Traditional lenders might have missed these nuances, but they’re crucial to understanding true collateral value.

Asset Liquidity

Here’s a critical question that often goes unasked in traditional banking: how quickly and efficiently can this security be converted to cash if needed? The answer isn’t always found in standard valuation reports. A property might look great on paper but have limited appeal in a downturn. Private lenders dig deeper into these practical realities.

Capital: Skin in the Game

Traditional banks often view capital contribution as a simple percentage – a tick-box exercise requiring borrowers to show a specific amount of equity. But in private lending, capital means so much more than just dollars in the deal.

Beyond the Percentages

At Bowery, the assessment of capital looks at the complete picture of a borrower’s financial commitment. Sometimes, a lower percentage contribution from a borrower with strong asset backing and proven expertise can be more compelling than a larger contribution from a less experienced player.

Financial Resilience

The real question isn’t just how much capital is being contributed, but how it fits into the borrower’s broader financial position. Does the borrower have additional resources to draw upon if needed? How much of their own wealth is meaningfully committed to the project’s success?

Strategic Capital Deployment

Some of Bowery’s most successful deals have involved borrowers who strategically deployed their capital across multiple projects. While banks might view this negatively, private lenders can appreciate the sophisticated approach to portfolio management when backed by experience and proven success.

Here’s where private lending truly sets itself apart from traditional banking. While banks might reduce character assessment to credit scores and default records, private lenders understand that character runs much deeper.

The Trust Factor

At Bowery, relationships aren’t just marketing talk – they’re fundamental to how lending decisions are made. A borrower’s character often proves more important than any other factor in predicting successful outcomes.

Professional Integrity

The way borrowers handle challenges often tells more about their character than how they manage success. Have they maintained transparent communication during difficult times? How have they treated other stakeholders in past projects? These insights come from being deeply embedded in the market and maintaining strong industry relationships.

Bringing It All Together

The Four C’s aren’t just a checklist – they’re interconnected elements that tell a complete story about lending opportunity and risk. While banks might treat them as separate boxes to tick, private lenders understand how these elements work together to create a fuller picture.

Consider this real-world scenario from Bowery’s portfolio: A developer sought funding for an innovative urban renewal project. The traditional banks wouldn’t look past their standard metrics. But the developer’s strong character, demonstrated capacity, quality collateral, and strategic capital deployment painted a compelling picture. Today, that project stands as a testament to the value of looking beyond conventional lending wisdom.

The Private Lending Advantage

This more nuanced, relationship-focused approach explains why private lending continues to grow as an asset class. While traditional lenders remain constrained by standardised criteria, private lenders can identify excellent opportunities that don’t fit the conventional mould – while maintaining robust protection for investor capital.

In the end, it’s not about choosing between different types of lenders – it’s about understanding where your project or investment might find its best home. Sometimes that’s with a traditional bank, but often, the more nuanced, relationship-focused approach of private lending proves a better fit for achieving long-term success. Talk to one of our investment directors to learn more.