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Winter 2000 The Five C’s of Credit

Cash. Money. Capital. Financing. No matter what you call it, one thing is for certain—you can’t start or run a business without it. A business may begin with a concept, an idea, a vision, but it takes cold, hard cash to turn those intangibles into a viable enterprise. If you own a business or plan to start one, sooner or later you will need financing. Lenders often use the “Five Cs” of credit when assessing a business loan proposal or credit line application: character, capacity, capital, collateral and conditions.


From the lender’s perspective, character is a reflection of your stability and your willingness to repay your credit obligations. Although character is somewhat intangible, don’t underestimate its importance to lenders. In evaluating character, lenders look for honesty, integrity and trustworthiness.

A small community bank might also take into account referrals from respected community members and your own level of community involvement. In making a character judgment, the lender will also look at your credit history and your commitment to the business. Lenders ask themselves such questions as:

Has the applicant used credit in the past and paid it back on time?

Has the applicant changed jobs often or moved frequently?

An unblemished credit history indicates you’re likely to be a good credit risk.


Capacity refers to your business’s ability to generate enough cash to repay the loan. To make that determination, the lender will look at your business’s earning power, income and cash-flow analysis, and your sales and expense projections.

Your existing credit commitments will also be considered in determining whether you can “afford” the loan. The lender uses this information to gain insight into your business’s market demand, business cycles, competitive position, and the financial savvy and competence of key management. More important, this information shows whether your company’s sales can support the repayment of the loan and your other financial commitments.

A comprehensive, well-prepared business plan is a great tool for demonstrating capacity. By showing how much you need to borrow, how you plan to use the funds, and how you will repay the money you borrow, you can instill a level of confidence in the lender.


Capital refers to your level of investment in the business. Lenders ask themselves: If the applicant isn’t willing to risk personal funds, why should I (the lender) take all the risk? Although there are no hard and fast rules about what constitutes an acceptable level of personal investment, lenders like to see business owners who are willing to take a proportionate share of the risk. A business owner with a significant financial stake in the business shows commitment to the business endeavor and confidence in its potential success. That means a great deal.


Collateral is property the borrower pledges in order to protect the lender’s interests. Collateral might take the form of business inventory, or the equipment or property the business owner is purchasing with the borrowed money. The amount and type of collateral the lender requires will depend on the type and purchase of your loan, as well as your credit history.

If your business has no fixed assets to serve as collateral, the lender may demand that you “collateralize” the loan with personal assets. Many small-business loans are backed by the equity in the borrower’s home. Most lenders believe that if a borrower is willing to put up his or her home as collateral, then the borrower certainly intends to repay the loan.

Keep in mind that the lender sees collateral as a secondary source of repayment in the event the borrower fails to replay the loan. The lender really has no interest in taking possession of your company’s inventory of 500,000 widgets. The lender’s hope is that if you have something of value at stake, you will be more inclined to repay the loan.


Conditions are the external factors that affect the success of the business, including the overall national and local economy, industry trends, regulatory, legal and liability issues, and local competition. Although these factors typically are beyond the business owner’s control, lenders need to consider them in making credit decisions.

Consult your CPA

Contrary to what many new business owners believe, banks want to lend money to credit-worthy businesses. To demonstrate that you and your business are a good credit risk, consult with a CPA who specializes in small business before you approach a lender. Your accountant can provide valuable advice on how to present your new or established business in the best light.

This article was prepared by the North Carolina Association of Certified Public Accountants (Raleigh, NC).

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