The 5 Cs of Credit Business

When deciding whether to offer you a small business loan, lenders typically evaluate the five C’s of credit: Character, Conditions, Capacity, Capital, and Collateral.

• Character primarily refers to your credit score, which gives lenders an indication of how likely you are to repay the loan. However, it also includes personal factors such as your education and business experience.

• Conditions relate to the market environment, including competition and broader economic factors. A well-prepared business plan that accounts for these conditions can help lenders assess the viability of your business.

• Capacity measures your business’s cash flow to determine whether you can cover existing expenses along with the new loan. Lenders will also examine your **debt-to-income (DTI) ratio**, which compares your total debt to your monthly earnings. The lower your DTI, the better your chances of qualifying for a loan.

• Capital represents how much of your own money you can contribute to the investment. Generally, the more capital you invest, the better loan terms and interest rates you’ll receive.

• Collateral is what you offer to secure the loan, whether it’s an asset you already own or the item you plan to purchase with the loan. If you default, the lender can seize the collateral to recover their losses.

Lenders assess a combination of these five factors when determining your loan terms and interest rates, and different lenders may weigh them differently. To improve your chances of securing a loan, focus on strengthening all five areas—pay your bills on time, maintain healthy business cash flow, and develop a well-researched business plan.