The 5 C’s: What Lenders Want

You’ll improve your chance of getting a business loan if your application addresses the Five C’s, an evaluation framework lenders use during the loan process.

It’s not easy to get a business loan from conventional lenders like banks or credit unions.

Part of the challenge is that these financial institutions simply don’t want to make these loans because there’s just not enough money in them to justify the risk. Another obstacle? Borrowers aren’t prepared for the close scrutiny their applications face from skeptical lenders.

You can’t control the financial industry’s profit margin. What you can control is how well you understand the Five Cs–and how well your application addresses them.

Character

Who are you, anyway? The lender will be assessing your ability to pay in the future based on your actions in the past. Have you shown good judgement and reliability—or not. The lender will run a credit check, ask to see your resume, and will do research on whether you’ve had legal or law enforcement problems.

Capacity

The lender wants to see that you have the means to make payments and ultimately pay off the loan or line of credit. You’ll need to show either that your business is generating enough cash, or you have another source of income, to handle the payments.

Collateral

Do you have a car, a house, a boat, jewelry or other assets of value? The bank might put a lien on these, so that in the event you default on the loan, they will acquire these assets to offset their loss.

Capital

The lender wants to see that you have “skin in the game.” How much cash have you put into the business so far, and what will you be investing in the future? The lender will ask for a balance sheet with your personal assets and liabilities

Conditions

Banks can be wary about making loans in certain industries (restaurants), geographic locations (a depressed area), and economic markets. They’ll want to know about your competitors, customers, geographic market, and other sales/marketing analysis.