The Five C's of Credit

Lenders traditionally evaluate loan applications using the "Five C's of Credit" framework. Understanding these factors can help you prepare a stronger application.

1. Character

Character refers to the borrower's reputation and track record. Lenders assess:

• Credit history: Personal and business credit scores and payment history
• Background: Any bankruptcies, judgments, or legal issues
• References: Professional and business references
• Experience: Your experience in the industry
• Stability: Employment and residence history

2. Capacity

Capacity measures your ability to repay the loan. Key factors include:

• Cash flow: Does your business generate enough cash to cover payments?
• Debt-to-income ratio: Current debt obligations vs. income
• Debt service coverage ratio (DSCR): Net operating income divided by debt payments (lenders often require 1.25x or higher)
• Revenue trends: Is revenue stable or growing?

3. Capital

Capital represents your investment in the business:

• Owner equity: How much of your own money is invested?
• Down payment: Many loans require 10-30% down
• Retained earnings: Profits reinvested in the business
• Personal net worth: Overall financial resources

4. Collateral

Collateral provides security for the lender:

• Real estate: Commercial or personal property
• Equipment: Machinery, vehicles, technology
• Inventory: Current stock value
• Accounts receivable: Outstanding invoices
• Personal guarantees: Your personal assets backing the loan

5. Conditions

Conditions relate to external factors and loan terms:

• Purpose of loan: How funds will be used
• Economic conditions: Industry and market health
• Loan terms: Amount, interest rate, repayment period
• Industry risk: Is your industry considered high-risk?

Credit Score Requirements

Credit scores play a significant role in approval decisions:

*Requirements vary by lender. Higher scores typically mean better terms.

Time in Business

• SBA loans: Typically require 2+ years
• Bank loans: Usually 2-3 years minimum
• Alternative lenders: May work with 6-12 months
• Startups: Often require personal credit, collateral, or SBA startup programs

Annual Revenue

Minimum revenue requirements vary significantly:

• Some lenders require $50,000+ annual revenue
• Others may require $100,000-$250,000+
• Larger loans typically require proportionally higher revenue
• Revenue trajectory matters as much as total amount

Industry Considerations

Some industries face additional scrutiny:

• Higher risk industries: Cannabis, gambling, firearms, adult entertainment
• Seasonal businesses: May need to demonstrate cash reserves
• New/emerging industries: May face skepticism from traditional lenders

Red Flags That Can Hurt Approval

• Declining revenue trends
• Recent bankruptcy or foreclosure
• Tax liens or judgments
• Inconsistent financial records
• Too many recent credit applications
• High existing debt levels
• Negative cash flow
• Insufficient documentation