The Five C's of Credit and Commercial Lending

Posted on Jan. 19, 2022

IMAGE: Woman in business meeting actively listening.If you’re considering a loan for your business, read on for the credit evaluation process. But first, let's start with our best advice: A loan is a loan, whether for personal or business purposes. While paying for a significant business expense without a loan may not be realistic, make sure you have an aggressive and practical plan to pay off your business debt quickly. Once you pay off your debt, put those funds toward your retained earnings to avoid incurring additional business debt in the future.

Now on to the credit evaluation specifics. You know lenders need to evaluate your creditworthiness and ability to afford a loan before they approve you personally, but what about your business? If you need a commercial loan, what do lenders look for, and how do they decide if you’re a good risk?

Well, just like with personal lending, it all comes down to the five C’s of credit. Read on to learn what you must know.


What Are the Traditional Five C’s of Lending?

The five C’s of lending are what most lenders use to determine if you’re a good risk for a loan. Considering the five C’s, lenders can decide how likely you are to pay the loan back in full, and therefore if they want to extend you a loan.

The traditional five C’s of credit are:

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

In your personal life, these characteristics look a little different than your business, but not much. In fact, your personal credit may play a role, too.


Most of the C’s have to do with your business, but yes, your personal credit does matter.


The Five C’s of Credit as They Apply to Businesses

Let’s look at how the five C’s of credit apply to a commercial lending situation.

1. Character.

What is your credit character? How have you handled past debts and responsibilities? Character refers to both your business and personal credit. A financial institution may look at the financial history of both the business and its principals when considering a loan application.

After all, how well you pay your personal debts reflects how you will run your business. For example, if you’ve never been late on your mortgage or your credit card bill, a lender can assume with some confidence that you’re likely to pay your business debts, too.

Your business credit history will allow a financial institution to infer something about your character. Of course, your existing business debt and related payment history also play a significant role. Other factors that affect the impression of your character include:

  • Industry reputation: Signs that you’re a leader in the industry, not necessarily in sales, but that you’re respected and trusted within the industry.
  • Experience: Business owners with experience in the industry they’re operating in can help predict their chance of success.
  • References: Any business references you can provide will help your reputation score.
  • Management: If you have employees, lenders may look closely at your management team to determine how well they run your business.

2. Capacity.

“Capacity” refers to your ability to repay the loan. This means lenders will look at your account balances and cash flow. Do you have enough to cover your current debts plus the new loan you are requesting?

You can prove your capacity in many ways, including:

  • Cash flow: This is the money you bring in that you’d use to pay your debts. The higher your free cash flow is, the easier it is to get financing.
  • Existing debts: The amount of existing debt you have factors greatly into how well you can (or can’t) afford another loan. The lower your current debts are, the better your chances of approval.
  • Credit scores: Your personal and business credit scores play a role here. The higher your credit scores are, the more capacity you show to handle your debts responsibly.


3. Capital.

“Capital” refers to your investment in the business. When you invest your own money, you show that you’re serious about the business and making it work.

If you can show a record of the money you or your management team invested, it shows your faith in the business. This level of commitment to the business provides added confidence you’ll do what it takes to make the business succeed.

Think of it like taking out a mortgage: You have to put down money to buy a home, and the higher your down payment is, the more likely you are to get approved, right? The same is true of your business loans.


4. Collateral.

“Collateral” is the asset(s) you put up in good faith and that can be forfeited should you be unable to make your payments. Collateral is typically required on all commercial loans, regardless of your capacity to repay. As your house is collateral for your mortgage, your business needs collateral, too. Some common options include:

  • Commercial real estate
  • Accounts receivable
  • Machinery or equipment
  • Inventory


5. Conditions.

You can look at conditions in several ways:

First, it’s the reason you need the loan. How will you use the funds? Are you trying to expand, stay afloat, buy equipment, or something else? Lenders consider the reason when deciding if you’re a good risk.

On the other hand, “conditions” can also refer to industry and/or economic conditions. If businesses in your industry are struggling right now, for example, you’re a higher risk. But, if your industry is thriving (and your business is, too), you may be a better risk.


Does Your Personal Credit Matter?

As you can see, most of the C’s have to do with your business, but yes, your personal credit does matter.

At Texell, we look at the big picture. We want to know how well you, as a person and as a business, can afford the loan you need. If you have a blemished personal credit history, we may take pause. But that doesn’t mean you can’t qualify.

It helps if you check your personal credit history before applying. Get access to your free credit reports here(opens in a new window), and determine if there’s anything you should fix before applying for a business loan.


Your First Step

Commercial lending adds a layer of complexity not present in personal loan situations. Luckily,  we have knowledgeable and friendly Commercial Lending Experts at Texell ready to address your specific needs. To get started, call 254.773.1604 ext. 5161 or email businessloans@texell.org.(opens in a new window).


If you wish to comment on this article or have an idea for a topic we should cover, we want to hear from you! Email us at editor@texell.org.

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