You Can Get a Loan- Meet the Five C's of Credit

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Lenders grant credit based on "the five C's": capacity, character, collateral, capital and conditions. In other words, they want to know if your business can afford to repay the loan (capacity); are you the kind of person who is likely to repay the loan (character); what's left for the bank if the business cannot repay the loan (collateral); your ultimate net worth (capital); and how the current economy and local business forecasts might affect granting credit (conditions).

In today's tight lending arena, lenders do not want to take risks and all they want to know is if your business goes under how they can get their money back.

So here are some details on the five C's:

  • Capacity is usually presented in the form of a cash flow forecast.
  • Character is a look at your credit report.
  • Collateral is cash or hard assets the bank can convert to cash to get back their loan if your business goes under. In some states, like Texas, you cannot use your home as collateral.
  • Capital or your net worth is determined by the business balance sheet and occasionally your personal one too.
  • Conditions can be fully explained in a business plan. A business plan would be very beneficial for the lender to understand how the loan will be used, to illustrate what results are expected, and to provide a synopsis of your industry's growth expectations.

When considering a new loan or lender, ask similar questions of them. Determine the three C's of any lender's offer: Is it the right size loan (capacity); does it have the right repayment terms/fees (character); and does it come with the best ancillary benefits (collateral). Don't forget that even if the loan is right for you, the lender might be wrong. Find one with a solid reputation who offers you some other tools that can help you run your business.

In the end, a long-term relationship with a lender you can trust, and who learns to trust you, whether it be a large national bank, a local community bank, or a credit union, will pay off in better credit, and more of it.

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