The 5 C’s of Credit

Today’s tumultuous economy poses a threat for business owners who are seeking to obtain capital. Banks have become rigid in their money lending habits. Because of this, the traditional bank loan process has become extremely tedious and very unforgiving.

The recent crack-down on the number of loans that banks approve has driven business owners to other sources, such as community development financial institutions (CDFI) for the money that they need. MetroAction is one of these institutions and they are committed to stimulating economic growth by providing small business loans and helping small businesses succeed.

But no matter what kind of institution you look to for a loan, your chances of loan approval will increase greatly if you meet a few important criteria. They are known as the 5 C’s of Credit.

  1. Capacity – Any financial institution will be reluctant to approve you for a loan if they do not think that you have sufficient capacity to repay the debt. Financial institutions will consider your business cash flow, past payment records on other loans and commercial debt, and the likelihood of your repayment of the loan.
  2. Capital – Capital is what you have personally invested in your business. You will be more likely to receive a loan if you have significant personal investments in your company. Having a large interest in your business shows lenders that you are committed to making your business succeed, which, in turn, increases their chances of receiving full loan repayment.
  3. Collateral – Collateral is another kind of guarantee that will make loan approval easier. It is something of value, besides cash, that can be used to repay a loan should your original form of repayment not be substantial enough.
  4. Conditions – Conditions are what you plan on using the loan for. It is important that you specify exactly how a loan will be used. A lender may also factor in how the local economy is doing and the economic state of your type of business when considering a loan request.
  5. Character – Character is the vibe or impression that you radiate. This helps a lender decide whether or not they think you are a person of honor and morals. Such a person is more likely to repay a loan and thus is more likely to receive a loan. A background check and the quality of the references that you provide will also weigh into the decision.

To learn about what lenders look for when reviewing a loan request, attend one of MetroAction’s Small Business Resource Clinics.  These free seminars are held regularly throughout our 8-county service area.