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The 5 Cs of Credit

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In the process of securing financing for their companies, many business owners choose to apply for a loan or line of credit through a bank.  Practically all lenders judge borrowers’ credit-worthiness using some form of the “5 Cs of credit.”  The applicants who are most likely to succeed in securing funds address all of the following:

  • Credit History: The lender will consider how you have handled credit obligations, both personal and business, in the past, as well as any outstanding debt.
  • Collateral: Personal and business assets, such as cash, real estate, investments, or equipment, can offer a contingent source of repayment.
  • Capital: Lenders are more comfortable when you have invested in the business yourself, particularly with assets that are liquid enough to be turned into cash during any setbacks.
  • Conditions: Basically anything that could affect your ability to repay the loan is considered. This includes external conditions, such as economic factors, industry regulations, or competitors. It also includes conditions very specific to the loan at hand, such as the purpose and your unique qualifications.
  • Capacity: Above all, the lender wants to see that you are able to repay the loan. Detailed projections will need to show how the loan, and any other outstanding debt, will be repaid.

As you apply for a loan or line of credit for your business, keep all of the above factors in mind.   Along with the actual loan application itself, a comprehensive business plan is essential to providing the information and level of detail that lenders require.  The burden is on you to convince the lender that you have established a realizable goal, have researched the exact amount of funding required, and posses both the background and future plan to secure repayment.  A polished and professional plan with financial projections is a tremendous asset as you advocate for yourself and the future of your company.

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