The 5 C’s That Determine Your Creditworthiness For A Loan
The applications for a business loan from small businesses are evaluated by a lender, using a certain protocol. The 5 C’s of a credit analysis is a part of such a protocol. It helps to allocate the limited funds of a small business in the evaluation process. When presenting a loan application, make sure every one of these 5 points is addresses in detail. It will enhance your chances of getting the funding you need.
- C #1 – Capacity
Generally regarded as the most important by the bank, capacity implies the ability of the small business to repay the loan. Apart from stating your expenses and revenues in your application, you should also discuss when and how exactly you plan to repay your loan, indicating the timing and the amount of your cash flow with regard to repayment. Your credit score and repayment history – both your personal and business – also matter. In your application indicating every possible source of repayment you can count on will also be of great help. - C #2 – Collateral
Collateral is a form of security you provide to your lender. It can be equipment or a building, owned by you or your small business. Your own home also can stand as collateral. A guarantee, provided by someone else, stating that the other party will repay the loan in case you fail to, can also be a collateral. With the economy going through hard times your lender may require a co-signer as well. - C #3 – Capital
Here the term capital stands for the owner’s investment in the business. Without you having made a significant investment into your business, the lender will not even consider giving you a business loan. - C #4 – Conditions
This term refers to the external economic environment as well as the exact intended purpose of the loan. In terms of tight economic times banks have scarce funds to loan and give preference to those businesses that present consistent and comprehensive description of the intended use of the loan: expansion-related, seasonal inventory buildup, etc. - C #5 – Character
This is a subjective judgment that the banker makes, basing on your education, experience, background and references. All this information helps to generate the picture of how trustworthy you are with regard to repaying your loan.
