Getting a small business off the ground is no easy task. Financial Institutions aren’t very excited to finance what they consider highly risky ventures and in recent years have even moved upstream to bigger and potentially less risky and more profitable fish.
According to Investopedia, The Five C’s of credit is a system used by lenders to gauge the creditworthiness of potential borrowers. The system weighs five characteristics of the borrower and conditions of the loan, attempting to estimate the chance of default. When you apply for a loan, lenders assess your credit risk based on a number of factors, including your credit/payment history, income, and overall financial situation. Here is some additional information to help explain these factors, also known as The Five C’s, to help you better understand what lenders look for.
The Five C’s of Credit:
- Character – Refers to a borrower’s reputation or track record for repaying debts
- Capacity – Measures a borrower’s ability to repay a loan by comparing income against recurring debts and assessing the borrower’s debt-to-income (DTI) ratio.
- Capital – Lenders also consider any capital the borrower puts toward a potential investment.
- Collateral – Collateral can help a borrower secure loans
- Conditions – The conditions of the loan, such as its interest rate and amount of principal, influence the lender’s desire to finance the borrower
Knowing The Five C’s is only the first step. Understanding how you and your business measure up in each category is the next step. Finding a way to mitigate any weaknesses in how your small business measures up to The Five C’s is what separates those who will find financing from those who will not.