The 5 Cs of Business Credit

The 5 Cs of business credit are:

1. Character

2. Capital

3. Capacity

4. Collateral

5. Conditions

Character is all about you. It’s about your personal history, your stability, and how reliable you are. This variable is more subjective than the others. It is one of several reasons it is best to do business with a bank where you have built relationships with the people who work there. The lender may check your education, work history, personal income, and personal credit history. This is one area of business credit where relationships matter!

Capital is about how much you have invested in your business. Whether you are seeking a bank loan or a loan from a private investor, the lender will want to see you are heavily invested in your own business. In general, the more of your personal money invested in your business, the better it looks to potential lenders.

After all, if you’re not confident enough to invest in your business, why should they be?

Capacity is about your ability to repay a loan per the terms. Cash flow, payment history, and the assets and resources of anyone providing a personal guarantee play a part. Collateral is something offered up as security for a loan. Anything from equipment to inventory to a home you own can be collateral. It may be easier to get approval for loans with collateral, and many loans will demand it. In some cases, the more that you can offer as collateral, the more likely you will get approval.

Conditions may mean any number of things, some of which could be out of your control. The current economy, for instance, may play a role in your ability to get approval for a loan. Other things they may look at include your industry and its economic status, and the loan’s purpose.

If your industry is suffering and businesses in your industry are struggling, it could harm your ability to get approval. Some loan purposes are easier to get approval for than others, too. Loans for riskier purposes like new and unproven expansions are often less likely to get approval.