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The Five C’s of Credit for a Small Business Loan

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Posted on January 25, 2022

Thinking about getting a small business loan? Familiarizing yourself with the five C’s of credit can help you understand the factors that lenders consider. Unlike a personal loan which examines individual credit history, business loans look at the five important characteristics to determine your creditworthiness.

What are the five C’s of credit?

Character refers to your business reputation. Lenders look at this as an indicator of stability, responsibility, responsiveness and integrity. Lenders are interested both in your credit reputation as well as your professional reputation within the industry and among consumers. 

A business with a poor credit rating and a history of providing poor customer service could be at high-risk. After all, if the business isn’t satisfying customers it could put the bottom line in jeopardy. 

The lender will also consider the business owner’s character and reputation. Major issues in the owner’s past could be seen as character flaws that hurt the business. 

If you have a good track record of making payments on time and consistently have good reviews, your business character should perform well by the lender’s standard. 

Capacity refers to your ability to make payments based on financial performance. The lender will review past financial statements to determine if your projected future performance will support your loan. Your cash flow needs to be high enough to support current and future debts to pass the capacity review. 

If your capacity is too low for the lender, they may lower the loan amount. Alternatively, if your projected performance is high, they may offer you more money.

Capital refers to the equity invested in the business by owners and stakeholders. Business equity is the value of your assets after deducting liabilities.

Equity can include tangible assets like property, equipment, inventory, accounts receivable and petty cash, and intangible assets like trademarks, patents and copyrights.  

Tangible business assets are considered collateral on your business loan. 

Lenders will look at the amount and type of equity held by the business to determine if that equity is enough to secure the loan should the business fail to make payments. 

Should your business fail to make payment or default on the loan for any reason, this collateral can be seized by the lender as a secondary source of payment. 

The conditions in a business loan refer to two things. First, conditions include the terms of the lending agreement such as principal, interest, fees and repayment terms. 

Conditions also include the economic climate in which the business is operating. The general economic climate is considered as is the state of a particular industry in which the business operates. 

If trends show a downturn in profitability for the business either generally or specific to their industry that could affect the lender’s decision to make a loan. On the other hand, if conditions are good, that can be advantageous for the business. 

In either case, the lender wants to know that the business is prepared to handle current conditions and mitigate risks. 

Why Are The Five C’s Important?

Knowing the five C’s before you apply for a business loan will help you anticipate obstacles and make necessary changes or improvements before you start the loan application process. 

The five C’s can help you assess both your strengths and weaknesses as a company. They may also give you important information that will help you approach the right lender. 

Savvy investors will also consider the five C’s before putting their capital into a business. Knowing how your business measures up will better prepare you to get the funding you need. 

5 Questions to Ask Before Applying For a Business Loan

  1. Am I Familiar with the 5 C’s of Credit?
  2. Is my business in compliance with all local, state and federal laws and regulations?
  3. Have I researched the current economic conditions in my industry?
  4. Is my business model viable for the growth I hope to achieve?
  5. What are my strengths and weaknesses as a business?

You know your small business better than anyone else. So you are in the best position to root out any weaknesses or shore up any strengths that might help you make a case to a prospective lender or investor.

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Anna Caldwell
Anna is a Chicago-based Content Marketing Associate and lead writer for Beyond Finance and the Top Dollar Financial Insights Hub by Accredited Debt Relief. She specializes in financial literacy, budgeting, personal finance tips, and debt management techniques, including debt consolidation options. She is passionate about creating approachable financial resources that help people overcome debt and other financial challenges.

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