Get to know the 5 Cs of credit
Learn what lenders look for when making financing decisions.
When you apply for business financing, the lender will carefully examine your application to determine whether you are creditworthy. The lender will likely make a decision based on the five Cs of credit: credit history, capacity, capital, collateral, and conditions. Let's take a closer look at these business credit factors so that you have a better understanding of what lenders look for.
1. Credit history
Every business credit bureau evaluates scores differently, but your credit history gives lenders a barometer on your financial health and behavior. Lenders want to ensure that you have a strong business and personal credit history before approving you for credit. If you have a history of paying your loans on time and not taking out more money than you can afford to pay back, lenders will most likely view you as a responsible borrower.
Your business's capacity to repay the loan is another important factor lenders consider. Lenders will want to see that your business has a positive cash flow and is returning a steady profit. They'll also want to know how you plan to pay back your loan. Prepare records of your verifiable income.
The money you invest in your business will also have an effect on lenders' credit decisions. If you invest a large amount of your own money into your business venture, it proves that you are serious about your company and will likely work hard to protect your money and that of your lenders. Lenders will also want to see that you have more assets than liabilities and have the ability to quickly convert your assets to cash if necessary.
Certain conditions beyond your financial history may contribute to your ability to secure credit. For instance, if a recession is expected to affect your industry, lenders might be wary about approving you for credit. But, if you can show potential lenders a detailed business plan and how a loan can help grow your company, it may help influence their decision.
To guarantee your repayment of the loan, lenders may require you to provide collateral. If you are unable to pay back the loan, for any reason, lenders may recover their loan by liquidating assets securing your loan. Examples of collateral may include real estate, inventory, and equipment. Putting up collateral may help you get approved for faster financing, obtain a larger loan amount, or secure a lower interest rate than you would with an unsecured loan.
As your business grows, you may consider business credit to finance your short and long term goals. If you maintain positive cash flow, demonstrate a strong credit history, and understand the 5 Cs of credit, you can improve your chances of securing financing.
Now that you understand the 5 Cs of credit, read up on how to manage your business credit score.