The 5 C’s of business credit are:
1. Character
2.Capital
3. Capacity
4. Warranty
5. Terms
Character is about you. It’s about your personal story, your stability, and how trustworthy you are. This variable is more subjective than the others and is one of several reasons why it is beneficial to do business with a bank where you have established relationships with the people who work there. To determine your character, the lender may consider your education, employment history, personal income, and personal credit history.
Again, it’s important to remember that this is an area of business credit where relationships do matter.
Capital is about how much you have invested in your business. Whether you’re looking for a bank loan or a loan from a private investor, the lender will want to see that you’re heavily invested in your own business. Generally speaking, the more of your personal money you have invested in your business, the better it will look to a potential lender. (After all, if you’re not confident enough to invest in your business, why should they?)
Capacity is about your ability to repay a loan according to its terms. Things like cash flow, payment history, and the assets and resources of anyone providing a personal guarantee will all play a role in determining your ability to repay a loan. Collateral is something offered as collateral for a loan. Anything from equipment to inventory to a home you own can be considered collateral. It may be easier to get approved for secured loans, and many loans will require it. In some cases, the more you can offer as collateral, the more likely you will be approved.
“Conditions” can mean any number of things, some of which may be beyond your control. The current economy, for example, may play a role in your ability to get approved for a loan. Other things to consider include your industry and financial status, and the purpose of the loan.
If your industry is suffering and companies in your industry are struggling, it could negatively affect your ability to get approved. Some loan purposes are also approved more easily than others. Loans for riskier purposes, such as new and untested expansions, are generally less likely to be approved.
When your business can meet these 5 C’s, you have a better chance of getting approved.
