The 5 C’s of Credit – Steps & Criteria Necessary to Obtain Financing
One of the primary questions small business owners may ask is: What criteria does a lender
use in evaluating my business loan request? To minimize the risk to lending institutions,
bankers use the 5 C’s of Credit to evaluate the creditworthiness of a loan request. The 5 C’s
of Credit include the following:
Capacity consists of your company’s ability to repay the loan and is considered the most
critical of the five criteria. The lender will consider the cash flow from the business, the
timing of the repayment, and the probability of successful repayment of the loan. Payment
history on prior and existing credit relationships – both personal and commercial – is
considered an indicator of future payment performance. Financial projections are
mandatory for a startup business and desired for an existing one.
Character is the general impression that you make on your banker as to whether you are
sufficiently trustworthy to repay the loan. Your educational background, credit history,
experience and references will be taken into consideration.
Capital consists of the funds you have personally invested in your company and is an
indication of how much you have at risk. Your banker would want you to have contributed
from your own assets and have been absorbed personal financial risk in establishing your
business. 10-30 percent of the project total is a typical range.
Collateral consists of specific assets offered as security for the loan on which a specific
legal lien is placed. You may need to pledge an asset you won, such as your home, to the
lender with the agreement that it will be the repayment source in case you cannot repay
the loan.
Conditions focus on the intended purpose of the loan. Will the money be used for working
capital, additional equipment, or inventory? The lender also will consider the local
economic climate and conditions both within your industry and in other industries that
could affect your business.
Common Collateral Values
Certificate Of Deposit
Stock (Publicly Traded)
Vehicles
Equipment
Real Estate
Inventory
Accounts Receivable
Percentage Accepted As Value
100%
75%
75-85%
50-75%
75-80%
25-50%
50-75%