The 5 C's of Credit & Character
11/02/2022
Introducing the 5 C’s of Credit
For every business starting out or reaching a new level of growth, they may need additional financing to achieve new goals. Those goals may require you to buy new equipment to be more efficient, purchase a building for extra space, hire additional employees for expansion, or to just buy basic inputs to keep pace with growing demand. A business loan can sometimes mean the difference between successfully reaching the next set of goals or being overrun by your opponents.
When you apply for a business loan, there are five key factors lenders examine to score your application and set your terms. These factors are the “Five C’s” - character, cash flow, collateral, capital, and conditions. Learning more about each may help you secure the necessary financing needed. The Five C’s create a comprehensive picture of the strengths & weaknesses, potential growth opportunities, and credibility of a business and their owners.
In the coming weeks, we will look at each one of these important factors of how to become credit worthy so you and your business can obtain the financing needed. For additional resources on the Five C’s, we recommend SCORE, a nonprofit organization associated with the Small Business Administration (SBA), and the article “The Five C’s for Making Your Business Credit-Worthy” by Helena Hauk, President of 5th Gear Consulting.
Character
While your own personal character is worth discussing with a lender, the more important aspect is what is your business character. Character refers to your credit history and how you have managed debt in the past. Lenders begin by learning more about you and the business. How long has the business been operating? What is your background experience in the industry (including your team)? Have you managed the business with financial success, and do you have a track record of profitability? Mapping your experience, expertise, and business goals together will show how you can run your business. Lenders want to know you are responsible, able to keep commitments, and that you understand the basics of financial management.
How you present yourself and your business can make a big impression. Understand your own credit report. It helps to have no negative marks along with a steady payment history. Your lender will take your credit score very seriously and you must too. Past handing of any previous debt gives a lender a general idea of how you may be able to handle new financing. The smallest issue left unexplained may create doubt in the lender’s mind to deny you your request for funds. Therefore, be ready to explain the background situation on any negative issues. Lenders may be willing to understand the circumstances and see how you have managed since.
Learn next month how “cash flow” may pave the way forward.