Get to know the 5 Cs of business credit

Learn what lenders look for when making financing decisions.

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  • The 5 Cs of credit

    The 5 Cs of credit

    When you apply for business financing, lenders evaluate your application based on the 5 Cs of credit:

    • Credit history

    • Capacity

    • Capital

    • Collateral

    • Conditions

    Lenders accept or reject requests based on these business credit requirements, so it's important you understand each one. Here's a breakdown of the five Cs of credit, as well as some tips on how to make your credit application more competitive.

  • 1. Credit history

    1. Credit history

    A strong credit history is critical when seeking financing because lenders want to see that you have an established financial track record.

    Lenders aren't just looking at your business credit. They want to see that you handle both your business and personal finances responsibly. To help differentiate between personal and business finances, you should consider setting up dedicated business accounts.

  • 2. Capacity

    2. Capacity

    Capacity is important because lenders want to see that you'll be able to repay them. Here's how you can demonstrate your capacity to repay a loan — and show lenders that your business is a good investment:

    • Positive cash flow. Proving that your business has positive cash flow tells lenders that you'll have enough money to meet your commitments. Be ready with financial records that detail cash flow throughout the life of your business.

    • Profitability. If your business doesn't turn a profit, lenders may question your ability to repay your loan. Show your projected profitability by creating a profit-and-loss projection for at least 12 months using industry standards and market analysis.1

    • Plans for repayment. Some lenders may be wary of granting additional credit if you already have other loans. Prepare to share all verifiable income that can be used to repay all your credit obligations.

     


    "4 Ways to Get a Business Loan." Inc. (2013) http://www.inc.com/marla-tabaka/4-ways-to-get-a-business-loan.html

  • 3. Capital

    3. Capital

    Your capital investment in your business is another factor in a lender's decision to offer you financing. Lenders are more likely to invest in you if you have invested your own money, because they know you'll work hard to protect your money and theirs.

    Here's how capital can factor into your credit application:

    • Make a personal investment in your business. Many lenders require you to cover at least 30% of your business's financial needs with your own assets.1

    • Demonstrate positive working capital. That's the difference between your current assets and current liabilities.2 More assets make you a safer investment.

    • Show you can get cash quickly. Lenders want to know that you can repay them even if your business has a rough spell. They're more likely to lend if you have assets that can quickly be converted to cash.

     


    1 "The 5 C's of Small Business Lending." Forbes magazine. (2013) http://www.forbes.com/sites/tykiisel/2013/11/05/the-five-cs-of-small-business-lending/

     

    2 "Working Capital." U.S. Small Business Administration. https://www.sba.gov/content/working-capital

     

  • 4. Collateral

    4. Collateral

    Lenders may ask you to put up collateral — any readily marketable, valuable asset that secures the lender's investment if you're unable to repay — as part of your loan agreement.

    Document what assets you have that can be sold by a lender for cash. These can include:

    • Real estate

    • Equipment

    • Savings and deposits (in some cases)1

    You may be able to qualify for a small loan — typically less than $50,000 — without collateral if you have a strong business plan and healthy credit histories and financial statements.2

     


    "Business Plan Section 8: Funding Request." Accion. (2014) http://us.accion.org/business-resources/articles-videos/business-plan-section-8-funding-request

    "Credit Factors: Collateral." U.S. Small Business Administration (SBA). https://www.sba.gov/content/collateral

    2 "Business Loans: $50,000 to $100,000." Business.com. http://www.business.com/business-loans/business-loans-50-000-to-100-000/

  • 5. Conditions

    5. Conditions

    Lenders will also consider several conditions beyond your financial situation, including how you plan to use their money and the overall economic climate of your industry. For example, if a major recession is anticipated and it would adversely impact your industry, lenders might factor this probability into their decision.

    Be prepared to explain the purpose of your loan and how the additional funds will help your business become more profitable.1 Show lenders your business's potential for growth by creating a business plan that addresses industry trends and your place in the competitive landscape.

     


    "Know What Lenders Look for." Wells Fargo. (2015) https://www.wellsfargo.com/financial-education/credit-management/five-c/

  • Prepare for future financing now

    Prepare for future financing now

    At some point, your business will need more money to grow. Put yourself in a position to obtain financing by building business credit now, and keep the five Cs of credit in mind as you develop your funding requests.

Published: April 24, 2015
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Apply Your New Knowledge

Answer these quick questions to move on to the next topic in the Business Plan Center.

1. Do you have the resources you need to apply for business financing in the future?
2. Are you confident that you could obtain a loan if you needed it?
3. Have you identified one C where you are particularly strong or weak?