517 Magazine Days of Giveaways

The ABCs of the Five Cs

You’ve got loads of ambition, endless ideas and at least one nice suit. What else do you need to receive a business loan? For starters: character, capacity, conditions, collater…

You’ve got loads of ambition, endless ideas and at least one nice suit. What else do you need to receive a business loan? For starters: character, capacity, conditions, collateral and capital (aka “The Five Cs of Credit”).

Although “C” might sound like an average grade, you can significantly improve your odds of winning your banker’s confidence by demonstrating your knowledge of the five credit dimensions of this all-important letter.

  1. Character. What’s your reputation in the community? Do you have integrity? Your character from a lender’s perspective is as straightforward as it sounds: your over-all trustworthiness, credibility and personality. When applying for a business loan, your banker will evaluate your past history with repayment of both personal and business obligations. This will involve viewing your personal credit report to de-termine your borrowing track record and reliability in
    loan repayment.

  2. Capacity. Also called cash flow, capacity verifies you’ll be able to repay your busi-ness loan. What is your debt-to-income ratio (monthly debt payments versus monthly income)? Be prepared to answer this question. You should have sufficient cash flow to support your business expenses and debts while also paying your own salary (and any other principal/employee salaries). If your business is in its infancy, have a solid business plan and financial projections you’re ready to share with your lender. The U.S. Small Business Administration website (sba.gov) offers tips and templates for writing a business plan.
  3. Conditions. What environmental and economic conditions might impact your busi-ness, as well as your ability to repay the loan? How do you plan on using the money? When looking at conditions, your banker weighs the economic landscape – the scope of your local market and your competition – to determine the viability of your business and financial health of your industry. Are economic conditions likely to change, deteriorate or improve? How will you react to these potential challenges and shifts? Thoughtful, conscientious entrepreneurs/business owners possess a keen awareness of the bigger picture.
  4. Collateral. Consider this your lender’s safety net or parachute in the event you’re unable to repay your loan. Should you default, collateral represents what a bank can take – e.g., real estate, inventory, equipment, accounts receivable – to recover its losses. In situations where a borrower has already demonstrated strong levels of capital, cash and/or historical cash-flow performance, a lender may not require collateral.
  5. Capital. Bankers will often look more favorably on your request for a loan when you’ve made a tangible personal investment in your business. In the lender’s eyes, a large contribution by you lowers the risk of default. For example, homebuyers who provide a down payment usually have an easier path to obtaining a mortgage. Capital includes things like cash contributions, retained earnings or other assets pledged as collateral.

While it never hurts to dress for success, your banker will use “The Five Cs of Credit” as the true yardstick of your “loan worthiness.” So whether you’re hoping to launch a clothing store or expand your existing information technology firm, understanding the ins and outs of your business’ character, capacity, conditions, collateral, and capital will increase your chances of securing that loan.

Beyond passing the Five Cs test, you shouldn’t go it alone either. Surround yourself with a top-notch certified public accountant, attorney, insurance agent and other experts who can advise you and nurture the long-term success of your business. Don’t just dream big – plan big when it comes to growth options and succession planning.


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