When getting a business loan, lenders look at the “5 Cs” of business credit. Let’s explain them so you can understand how to use them to your advantage:
•Character
•Capital
•Capacity
•Collateral
•Conditions
Character: This is basically what lenders think about you. Do you have a history of paying bills on time? Are you someone they can trust? It’s not just about numbers; it’s about your reputation.
That’s why having a good relationship with your bank helps. They know you better, and that can work in your favor.
Capital: This is about how much money you’ve put into your business from your own pocket. Lenders like to see that you’ve invested your own cash because it shows you really believe in your business. It’s like saying, “I believe in this so much that I put my own money on the line.” That kind of confidence can make lenders more willing to invest in you, too.
Capacity: This is about your business’s ability to repay the loan. Lenders will examine your business’s income and expenses to ensure you can handle the loan payments. They want to see that you’re making enough money to cover your costs and still pay them back.
Collateral: Think of collateral as a safety net for the lender. You agree the lender can take something of value—like equipment, inventory, or even your house—if you can’t pay back the loan. Having collateral can make it easier to get a loan because it lowers the risk for the lender.
Conditions: This is about the big picture—things like the economy, how well your industry is doing, and what you plan to use the loan for. Some things might be out of your control, like a downturn in the economy. But lenders will consider these conditions to decide how risky your loan might be.
The 5 Cs formula is simple. Lenders want to know who they’re lending to (Character), that you’re committed to your business (Capital), that your business can pay back the loan (Capacity), that there’s a backup plan if things don’t go as expected (Collateral), and that external factors won’t make it hard for you to repay (Conditions). Understanding these 5 Cs can help you see what lenders are looking for and improve your chances of getting approval.
About the Author
Robert Jackson is currently the CEO of Alln4fam Consulting Inc.
At Alln4fam Consulting, he specializes in helping business owners establish excellent business credit scores and then leverage those scores to access cash and credit for their businesses.
For more information on business credit scoring, business credit, visit: https://alln4businesscredit.com/
