Loan Evaluation Algorithm

Understanding how we evaluate small-business loan applications using the Enhanced 6 Cs Assessment Framework

Overview

Our loan judging engine evaluates small-business loan applications using a comprehensive 6 Cs Assessment Framework. Each application receives a score out of 100 points, with decisions made based on the total score and specific risk factors identified during evaluation.

The 6 Cs of Credit Assessment

Credit (0-20 points)

Evaluates the business owner's credit score to assess creditworthiness and payment history.

Scoring Breakdown:

≥720:20 points - Excellent credit
680-719:16 points - Good credit
640-679:12 points - Fair credit (flag raised)
<640:6 points - Poor credit (flag raised)

Capacity (0-25 points)

Measures the business's ability to repay the loan using the Debt Service Coverage Ratio (DSCR). Calculates monthly loan payment based on 5-year term at 8% interest rate.

DSCR Formula:

DSCR = Monthly Net Operating Income / (Existing Monthly Debt + New Loan Payment)

Scoring Breakdown:

≥1.25:25 points - Strong debt service coverage
1.10-1.24:18 points - Acceptable coverage (flag raised)
1.0-1.09:10 points - Weak coverage (flag raised)
<1.0:3 points - Insufficient coverage (flag raised)

Capital (0-20 points)

Assesses business financial strength based on years in operation, business structure, and ownership percentage.

Scoring Components:

Years in Operation (0-12 points):≥5 years: 12 pts | 2-4 years: 8 pts | <2 years: 4 pts (flag raised)
Business Structure (0-5 points):Corporation/LLC: 5 pts | Other: 3 pts
Ownership (0-3 points):≥51%: 3 pts | <51%: 1 pt

Collateral (0-15 points)

Evaluates asset backing by comparing collateral fair market value to loan amount.

Coverage Ratio:

Coverage Ratio = Collateral Value / Loan Amount

Scoring Breakdown:

≥1.5:15 points - Strong collateral coverage
1.2-1.49:12 points - Good collateral coverage
1.0-1.19:10 points - Adequate collateral coverage
<1.0:6 points - Insufficient coverage (flag raised)
Not provided:5 points - Unsecured loan (flag raised)

Character (0-20 points)

Assesses owner integrity and trustworthiness based on citizenship status, bankruptcy history, and criminal convictions.

Scoring (starts at 20, deductions for issues):

U.S. Citizenship:Confirmed: No deduction | Not confirmed: -5 pts (flag raised)
Non-U.S. Citizen:-3 pts (flag raised)
Prior Bankruptcy:-10 pts (flag raised)
Criminal Convictions:-8 pts (flag raised)

Decision Making

Approve

≥75 points

Application meets all criteria for approval. No conditions required.

Conditional Approve

60-74 points

Application approved with specific conditions or mitigants required based on identified risk factors.

Decline

<60 points

Application does not meet minimum underwriting standards.

Special Cases

Ineligible Applications

Applications are automatically marked as Ineligible if the loan purpose includes:

Building a house
Residential construction
Personal residence
Home purchase
Home construction

Incomplete Applications

Applications are marked as Incomplete if required KYC fields are missing:

Owner full legal name
U.S. citizenship status
Owner home address
Date of birth
Business owner credit score
Exact loan amount requested
Loan purpose

Conditional Approval Mitigants

For applications scoring 60-74 points, the system generates specific mitigants based on identified weaknesses:

•Low Credit Score: Require personal guarantee from owner
•Weak DSCR: Require DSCR improvement plan or reduce loan amount
•Insufficient Collateral: Require additional collateral or reduce loan amount
•Limited Business History: Require business plan and financial projections
•Character Issues: Require detailed explanation and supporting documentation

Technical Implementation

Loan Payment Calculation

Monthly loan payments are calculated using standard amortization formula:

PMT = P × (r(1+r)ⁿ) / ((1+r)ⁿ - 1)

P: Loan principal amount
r: Monthly interest rate (8% annual / 12 months = 0.00667)
n: Number of payments (60 months for 5-year term)

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