When applying for a small business loan, or any business loan for that matter, you want to look your best to the lender to ensure a higher chance of being granted the loan. In the line of credit exist “5 Cs” that work as a yardstick for creditors/lenders to evaluate a potential borrower and gauge the credit risk they would incur in entering into a transaction with the said borrower. The lower the risk deemed by the creditor in a situation, the higher the chance that he or she will agree to provide the funds to the borrower.

Each of these signifies a criterion that allows the creditors in gauging the credit risk of lending to that particular borrower.The 5 Cs that help you qualify for a small business loan are as follows:

  1. Character
  2. Capacity
  3. Capital
  4. Collateral
  5. Conditions

Character refers directly to the borrower and his or her reputation in the market. This is not to be taken lightly as a “word of mouth” can certainly have an effect on the creditor’s mind. In a more technical sense this also refers to the credit history of the borrower. Here the creditor will analyse the prior financial record of the borrower to see if he or she has previously borrowed any money and if so, was it paid back according to the payment plan or not; do the people in the market trust the borrower; what credit ratings do companies formerly owned or run by the borrower hold (if any) – and further such questions to determine what sort of person is asking for a loan.

Capacity inherently measures whether the borrower will realistically be able to pay off the loan considering his or her past record, and most importantly by analysing the income of the borrower. The creditor may look at employment record, debt-to-income ratio, viability of the small business for which the loan is being requested for, etc. to determine whether the borrower will in fact be able to repay the loan as scheduled.

Capital means that the creditor will take into account any personal source of income of the borrower; this can include household income, savings, investments and other assets. When requesting for a small business loan, the creditor will generally assume that all capital that is borrowed will be directly invested into the business – for the creditor this assumption entails a lower chance of default on the part of the borrower. This is because the creditor assumes that once a large chunk – if not all – of the borrowed money will potentially go into the business venture, the borrower is definitely serious about the project and will be serious about repayment. A solid business plan with a clear cut financial structure allows the creditor to determine this easily.

Collateral refers to the pretty straightforward and common concept encountered in the process of obtaining a loan. This is in essence a way to secure the loan by putting up some form of property or asset to ensure the creditor that in case of default (due to a failed business for example), he or she will be repaid a large portion if not all of the debt. In case of default, the property or asset put up as collateral is then passed on to the lender; although, this is a fairly over simplified explanation. A creditor carefully analyses all that is put up as collateral and appraises it against the value of the business loan requested.

Conditions and terms must always be agreed upon by both the creditor and the borrower. While most banks and institutional lenders will have set conditions of repayment, a business cash advance company can be fairly flexible. In the former, the borrower’s acceptance (or not) of those conditions can influence the creditor’s decision; if the creditor feels that the borrower is not fully committed to the stipulated conditions, he might not approve the loan. In the latter, a lender from a business cash advance enterprise can work out the repayment details with the borrower and settle for a mutually beneficial set of conditions.

A good knowledge of the above 5 Cs can help borrowers prepare themselves when they need to request for a small business loan. A self-analysis of the above provides the opportunity to recognise their own image as a borrower and allows them to improve where they can before approaching lenders.