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The 5 C’s of Credit and how to become expert in it?

Character, cash flow, capital, conditions and collateral are the 5 C’s or features of credit.

While on an academic scale, a “C” average can sound middle-of-the-road, the trick to getting business funding from banks and other financial institutions is to nail the 5 C’s of credit.

A structure used by many conventional lenders to assess prospective small business borrowers is the 5 C’s, or characteristics, of credit-character, capacity, resources, conditions and collateral.

The 5 C’s of credit

  • Character
  • Capacity/Cash flow
  • Capital
  • Conditions
  • Collateral

There are no specific guidelines about how lenders weigh these features and various lenders can concentrate more on each other.

Online lenders, for instance, might be more likely to accept the personal credit score of a borrower on a loan application, whereas banks might care more about collateral and resources you’ve invested in the company.

Brad Farris, a business development advisor with Anchor Advisors in Chicago, says the secret to small-business success is focusing on items you can manage. Banks believe in them, so we have to live with it,” he says, “The 5 C’s are one of those things that just are.

We have rounded up the five features and some tips to put the best foot forward.

One of the 5 C’s is Character

What it is: a lender’s perception of the general trustworthiness, reputation and personality of a borrower.

Why it matters: Banks want to lend and hold promises to people who are accountable.

How you evaluate it: Your job experience, credit background, qualifications, references, credibility and relationships with the lender.

How it can be mastered: “Character is something you can affect and encourage, but only if you have a relationship-care bank,” Farris says.

Construct a partnership if you use a local or community bank. Farris suggests sharing with your banker good news about your company and seeking ways to promote the bank. “He says, “Make yourself somebody they want to lend to.

Second in the 5 C’s list is Capacity/Cash flow

What it’s all about: the willingness to repay your loan.

Why it matters: Lenders want to be sure that the business generates enough cash to completely refund the loan.

How to evaluate it: Financial metrics and benchmarks, loan value, credit history and repayment history (debt and liquidity ratios, cash flow statements).

How to master it: Certain online lenders can be more open to helping you finance cash flow gaps instantaneously. Before you apply, pay down debt if you’re concentrating on local banks. Often, before going to the bank, measure your cash flow to understand your starting point.

» MORE: Where to find loans with cash flow


What it is: The amount of cash that the company’s owner or management team invests.

Why it matters: banks are more likely to lend to owners who have invested in the venture with some of their own capital. It demonstrates that you have some “skin in the game.”

How you evaluate it: The capital invested by the lender or management team in the company.

How it can be mastered: According to Small Business Administration, nearly 60% of small business owners use personal savings to start their business. Keep a record showing your investment in the venture.

There are other avenues, however, if you don’t want to take on all the risk yourself, to gain startup capital.

» MORE: In 5 stages, how to get a business loan?


What it is: the state of the organisation as well as what you will use the funds for, whether it is rising or faltering. It also considers the state of the economy, market dynamics and how your ability to repay the loan could be impacted by these factors.

Why it matters: Banks tend to lend to companies working under favourable conditions to ensure that loans are repaid. They seek to understand threats and to defend themselves accordingly.

How you evaluate it: From a competitive environment analysis, supplier-consumer relationships, and macroeconomic and industry-specific concerns.

How to master it: The economy can’t be regulated, but you can plan ahead. While it might seem counterintuitive, when your company is strong, apply for a business line of credit.

“If you don’t need it, banks will always be happier to lend you money,” Farris says. They might decrease the credit line or take it away if circumstances worsen, he adds, but at least if things go south, you have some buffer for a while.


What it is: The services that are used to guarantee or secure a loan.

Why it matters: If the borrower does not repay a loan, collateral is a backup source.

How it’s evaluated: From hard assets like real estate and facilities; working capital, such as receivable accounts and inventory; And a borrower’s house, which can also be counted as collateral.

How it can be mastered: If you are suing or if a lender is seeking to recover, choosing the correct business arrangement will help shield your personal assets from being confiscated by a lender. It helps mitigate the risk by creating a legal entity.

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