What do lenders consider when they review loan applications from business owners, startups, and entrepreneurs?
Most financial institutions follow a common set of criteria when assessing a loan request, often referred to as “the 5 C’s of credit.” What are the 5 C’s of credit, you ask?
The five C’s of credit are:
1. Character, as in your overall stability, like length of current employment plus your experience and performance in the industry.
2. Collateral, meaning any asset you own (for example property) that you can pledge in the event you cannot repay the loan. Often lenders will also ask for a guarantor – that is someone who agrees to pay the debt if you cannot.
3. Cash Flow, also called “Capacity,” is basically your ability to repay the loan. What is your debt-to-income ratio (a.k.a. monthly debt payments versus monthly income) and what is the cash flow from your business?
4. Capital, as in your overall net worth. That’s the value of what you own (assets) minus the amount you owe. Capital also takes into consideration the amount you have personally invested in the business, or how much skin you have in the game.
5. Conditions takes into consideration the environment of the loan – what’s going on in your industry and with your competitors? What’s the intended use for the loan? Conditions take a look at the outside forces impacting your repayment ability.
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