The 5 C’s of Credit

Written By Guest User

When applying for a loan or line of credit for your business, every lender checks your 5 C’s of Credit. The 5 C’s of credit are: Character, Capacity/Cash Flow, Capital, Conditions and Collateral.

First let's talk about character. Character is the trustworthiness of the borrower. The lender will want to check your personal and business credit score. After reviewing your credit history, the lender will also want to look at your business website. The lender will be looking for several key things when visiting your business website such as your mission statement and the owner’s bio.

Character is:

  • Trustworthiness of the borrower(s)

  • Credit Score

  • Credit History

  • Mission Statement

  • Bios

  • Website

Next, lenders check your capacity and cash flow, this is the borrower’s ability to pay back the loan.

The lender will want to know your debt to income ratio (DTI). The lenders calculate DTI by adding a borrower’s total monthly debt payment and dividing that amount by the borrower’s gross monthly income.  The lower the DTI, the better the chance of the borrower qualifying for a new loan or line of credit.  Every lender is different, but many lenders prefer a borrower DTI to be around 35% or less before approving an application.

Capacity / Cash Flow is:

  • Borrower’s ability to pay back the loan

  • The debt-to-income ratio

  • DTI to be around 35% or less

Capital is the amount of money that the borrower personally invests in their business.

Capital is:

  • Borrower’s personal investment

Conditions, lenders would like to know the status of your business.  They want to see that your business is thriving, expanding or trending upwards.  Lenders do not want to see that your business is falling flat or trending downwards.  

Conditions are:

  • Status of your business

Lastly, collateral lenders want to know what assets you have to be able to secure the loan or secure the loan or line of credit.  This helps give the lenders the assurance that if the borrower defaults on the loan, the lender can get by repossessing the collateral.  Assets can be cash, cars, cash value on insurance policies. Homes, equipment, and artwork to name a few.

Collateral are:

  • Assets you have to secure the loan or line of credit

Now that you know the 5 C’s of Credit, if you’re ready to learn some tips to improve your 5 C’s, I’d encourage you to watch my webinar, Getting $100K & Beyond! Loans & Lines of Credit for Established Businesses. We’ll discuss tips to improve your 5 C’s in this webinar presented through the Small Business Development Center in Partnership with the SBA, Community Business Partnership and George Mason University Mason Enterprise.

 
Guest User