5 C's of credit

 
 

Many banks and lenders assess the creditworthiness of potential borrowers by reviewing the “5 Cs of Credit”

No strict or uniform guideline exists on how the banks evaluate the “5 (or 6) Cs of Credit,” i.e. different lenders assign different weights to each of the attributes. There may be other factors that individual banks consider when evaluating your business loan application, however, the “5 (or 6) Cs” is a good starting point.               

Think about the 5 Cs in terms of the risk and return relationship.

Traditional lenders routinely assess potential borrowers based on the 5 Cs. Business borrowers may also want to explore alternative lending options, such as crowdfunding, peer-to-peer lending, etc.     

Just as there are consumer credit reporting agencies (e.g. Equifax, Experian, TransUnion, etc.) that gather data on individuals, there are also similar firms that collect and compile information on businesses (e.g. Dun and Bradstreet, Equifax, and Experian, etc.). Check out each to learn more about how they determine your score and ways to improve your individual and/or business credit score.

 

CASH / CAPITAL

the amount invested by you. How much will you be investing in your own business project or venture? This may include savings, investments, and other assets. It’s unlikely a bank will finance 100% of your project.


CAPACITY / CASH FLOW

can you comfortably afford the loan payments? A lender will likely review your employment history and income levels to evaluate if you will be able to repay outstanding debt.

COLLATERAL

assets that can be used to secure a loan include the borrower’s home, real estate, equipment, accounts receivable, etc.


CHARACTER

refers to your background (e.g. education, experience, employment history, etc.), credibility, knowledge of the business or business acumen, and reputation. Lenders will be judging whether or not you will be a good borrower (i.e. someone who will repay the loan on time and in full). A great first step is to meet with banker(s) and start building that relationship.

CREDIT HISTORY

indicator of how well you manage your finances. It’s a summary of your credit standing, how well you manage credit, and pay down debt over time. Do you know your FICO (or Fair Isaac Corporation) score? FICO scores range from 300 to 850; in general, scores above 680 indicate a good credit history.          


BONUS - CONDITIONS

Conditions refer to the overall economy, market conditions, and use of the loan funds. For example, are you borrowing funds to expand your operation (and keep up with growing demand) or will the funds be used to pay down outstanding debt?