The 5 C's of Credit Deciding Your Business Fate

The 5 C's of Credit Deciding Your Business Fate
Amy Fontinelle
on March 22, 2020
Read in 4 min

When it comes to small business loans, success is spelled with the 5 c’s of credit.

We know, requesting a business loan can be intimidating enough without getting a mnemonic device involved.

But if you’re asking yourself how lenders will evaluate your business, the 5 c’s of credit are a neat and tidy way to remember what counts across the board.

Remember, each lender will have its own start up business loan requirements that determine which companies it will lend to and what loan terms to offer.

However, you can get a general idea of what they’re looking for by understanding the 5 c’s of credit from an underwriting perspective.

The 5 C’s of Credit That Determine Whether Your Small Business Gets Funding

1. Capital

Most businesses need working capital from time to time, and even more need start up loans just to get up and running.

Perhaps the most readily understood of the five c’s of credit, capital refers to cash as well as real estate, equipment, machinery, vehicles and inventory already invested in the business by you and/or the other stakeholders.

Startup business owners often don’t have enough cash to purchase everything, and even if they do, they don’t want to risk everything on their new business.

So new businesses typically seek financing to meet their capital needs.

Paradoxically, banks are more likely to provide financing if you have some skin in the game, meaning that you’ve funded 20 percent to 30 percent of your business’s capital needs using your own assets.

For best results, you’ll want to have an established banking relationship and a nice sized investment before requesting any of the following financing:

Business line of credit

Good for borrowing different amounts at different times rather than a large sum up front.

A line of credit provides ongoing access to funds; offer up collateral for a more competitive interest rate.

You can borrow against your line again and again as long as you keep repaying it–

And you’ll only pay interest on your outstanding balance.

Equipment financing

Buy the equipment you need now by pledging it as collateral for the loan (just like you’d do if you needed to finance a car for personal use).

Equipment financing can be used for everything from commercial trucks to office printers, but you may need a down payment to qualify.

SBA loan

This government-backed loan might be right for borrowers who need a long-term, low-interest loan and can’t get it from other sources.

However, the request process can be lengthy due to small business loan underwriting guidelines, so an SBA loan may not help if you need money fast.

Learn more: SBA Loans: The Ultimate Guide to Government Lending

2. Credibility (or Character)

Your business’s credit consists of not just the business’s credit score but also your personal credit score, especially when you own a new small business.

Your credit score shows how likely you are to repay your future debts in full and on time based on your past and current repayment habits for credit cards, student loans, auto loans, mortgages and other types of debt.

  • A good personal credit score is generally considered anything above 670 on a scale of 300 to 850, though standards vary by lender and by credit bureau.
  • A good business credit score depends on which credit bureau is doing the scoring, since they all use different methods.
    • For example, a PAYDEX score of 80 to 100 means that your business demonstrates a low risk of paying late; this score is incorporated into Dun & Bradstreet’s methodology, which assigns businesses a risk score of 1 to 5, with 1 indicating the lowest risk.

To prove your credibility to the bank, a qualified management team with experience in the line of work where you’re currently seeking funding will also help–

So will successful track records as owners of another business; it might be a good time to polish up your resumé.

3. Conditions

A bank won’t lend you money if your financial business conditions aren’t sound.

You don’t need the 5 c’s of credit to put that one together.

Conditions can refer to industry trends or the current economic climate overall.

Remember, lenders are risk-averse and will find out if you’re hiding a vulnerability.

What can you do? 

You could start the process of requesting a loan before you actually need it, to demonstrate favorable conditions to your lender of choice.

See Business Lenders

Learn more about 5 Advertising Tools to Help Your Small Business Grow

4. Cash Flow (or Capacity)

To get a loan, you’ll need to prepare statements showing your business’s current cash flow as well as its cash flow projections for the next three years.

The lender might ask for monthly cash flow projections for the next 12 months and annual cash flow projections for the two years after that. You’ll need enough cash flow to cover the proposed loan payments.

If your business doesn’t have enough cash flow, you may still qualify with enough personal cash flow from another source.

Learn more about How to Improve Cash Flow in Your Business

5. Collateral

Not unlike the first of the 5 C’s of credit, collateral refers to assets on hand.

But you can’t commit all your assets and expect to get a good rate on your small business loan.

You should always have something of value available to secure your loan.

This could be a business asset or a personal asset that you already own that you’d be willing to part with in the unlikely scenario that you default on your loan.

To get motivated, read these Entrepreneurs Stories

Five C’s of Credit – The Bottom Line

Knowing the five c’s of credit takes some of the mystery out of the loan request process and can help you steer your business toward securing financing.

Awareness of what underwriters look for in making loan approvals helps you to see the process from their perspective and make your company a more attractive loan candidate.

Anything you do to improve your business’s chances of borrowing will also strengthen your company and improve your odds of success, with or without a loan.

Now that you know the 5 c’s of credit, you’re ready to start the process of connecting with a lender.

See Business Lenders

Amy Fontinelle Finance Journalist

Amy Fontinelle is a writer, editor, and personal finance expert.

Her articles have appeared at Investopedia, Bankrate,, The Simple Dollar,, Yahoo,,, Bankaholic,, Saving Advice and other sites.

Amy’s clients include personal finance websites, financial institutions, public policy organizations, academic journals, and professional economists.

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