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Boost Your Loan Application by Learning the 5C’s of Credit

Small Business Majority

If you’ve been looking for financing for your small business, you’ve most likely considered taking out a loan. Unfortunately, most banks view small businesses as a risky investment, but one way to boost your chances to secure a loan is to understand what lenders will analyze when considering your application. Lenders use the 5 C’s of credit to measure your “creditworthiness” and your ability to repay a loan. These considerations help them gauge how good of a borrower you’ll be and whether you are a sound investment.

Below we review the 5 C’s of credit, which will give you insight into what lenders look for and how you can strengthen your application.

  1. The first C is character:
    Character is a lender’s opinion of how trustworthy and reliable you are. Background, references and reputation are reviewed, but most often lenders will use your credit history to see if you have a good track record of repaying debt. Borrowers with good character pay their loans back on time, every time, and usually have higher credit scores.
  2. Capacity/Cash flow:
    Lenders are looking at your capacity or cash flow to make sure you have the money to repay the loan, plus interest. Lenders will review your cash flow statements, debt-service coverage ratios to make sure your net cash flow is positive, month-to-month on a consistent basis. 
  3. Capital:
    Capital is how much of your own money you’ve invested in your business, or basically how much “skin in the game” you have. Lenders want to know that you stand to lose something if your business doesn’t survive because they know you’ll fight that much harder to keep it alive. If they see you’re not invested in your own business, why should they be? Capital shows a lender your level of dedication and commitment to your business.
  4. Collateral:
    Collateral refers to property or assets that can be pledged as security, such as real estate, equipment or a car. By putting up collateral, you’re giving your lender the right to seize your property in case of default. It’s basically a lender’s back-up plan.
  5. The last C is Conditions:
    Lenders will look beyond what they see on paper and consider outside factors that could hit your business, such as economic or industry factors. Some factors are out of your control, but you can plan for them and show your lender that you’re prepared to minimize your risk.

Now that you know what lenders look for, think about how your business measures up in each of these categories. It’s important to note that lenders may place more value on certain attributes over others. Squaring away the 5 C’s of credit can restore your lender’s confidence in their investment.

And when you’re ready to apply for a loan, we can help you find a lender! Check out our free webinar, Access to Capital 101 & Business Credit 101, available anytime on our YouTube page. Additionally, our partners at Nav can help you manage your credit and find access to streamlined financing. 

This work is supported by the Sam's Club Giving Program.