The Five “C”s lenders look for in a borrower

Lenders focus on 5 things they will take into consideration before approving a loan. These conditions apply to both personal and business loans and are taken very seriously and one should be prepared to address these before applying for a business loan. The 5 C’s are capital, collateral, conditions, character, and capacity.
Capital are funds you invest in the business, also called equity. This is the amount you are personally willing to invest of personal or investor funds that are unrelated to debt obligations. The equity percentage of the total funding is critical because is the amount you are willing to risk; if it is a low percentage like 5% then that indicates to a lender that one is not personally invested. 20% of more indicates one is fully committed to an enterprise. For existing enterprises one will be asked to provide personal and business records showing every detail of the business including ownership records, tax records, accounts payable, and accounts receivable. A note on tax records, internal financial statements must be able to tie to tax returns with allowable adjustments.

Collateral refers to personal and or business assets that you are willing to use as security in case of default on a loan. The bank wants to be assured there is a second source of repayment. Equipment, vehicles,  buildings, receivables, and inventory are possible sources of repayment of the business loans that can be used as collateral.
Conditions are the purpose of the business loan that are usually detailed in a document called Source and Use of Funds. This details how the total enterprise funds will be used, broken down into working capital, equipment, inventory, leasehold improvements, marketing, or other. Other conditions considered are the general economy, market specific economy and conditions within your business and in businesses that could affect your business like your suppliers and or service companies.

Character includes such things as your credit history, experience, reputation and similar factors. Lender will determine whether or not you can be trusted to repay the business loan if granted. Some of the things the lender might ask for are your educational background, your experience in business and in your industry. More than likely they will request references for you and the background and experience of your employees may also be considered.

Capacity to repay the business loan is another important factors for the lender. Lenders will want to see details on know exactly how you intend to repay the loan. The lender will consider cash flow, the term of repayment, and the probability of successful repayment of the loan. Payment history on other credit relationships, personal and business, is considered a sound indicator of future payment performance. A business must be able to service all of it’s debts as they come due in addition to it’s loan payments. Applicants need to provide detailed monthly and annual financial projections including the successful servicing of the loan.


The sum of these factors paint a picture for lenders of the likelihood of repayment of a loan. Since lenders do not participate in the upside of the business if it does very well like a venture capital firm would, they want to be assured that each and every loan has a high likelihood of being paid in full and on time.

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