The 5 C's of Credit: What A Lender Looks For

How does a lender know if a borrower is a good risk? Before offering a loan, lenders assess several criteria to determine whether they’re eligible for a loan. There are five key factors most lenders will consider, which are known as the Five C's of Credit.

• Capital 
• Condition 
• Capacity  
• Collateral 
• Character 

Each factor helps the lender evaluate the borrower’s commitment to the business and overall credit worthiness. Together, these criteria influence the final loan decision. Here’s how the 5 C's breakdown into the factors under review:  

Capital refers to the assets or financial resources available for your use in managing business growth and operations.  Lenders want to see if you have contributed your own funds and personal commitment to the venture. The greater your personal interest, the more likely you are to meet your loan obligations.

Condition refers to the broader market environment and external factors that could affect the success of your business. Lenders will assess local and macro-economic trends, industry stability, vendor and customer relationships, and competition.

While you can’t control the broader economy, you can take steps to demonstrate that your business is built to weather market changes. 

This shows whether your business will have sufficient working capital to repay the loan. Do you carry too much debt in relation to your income? What is your cash flow management strategy? What about your pay structures?  The lender will take all this into consideration in addition to your payment history to determine the probability of repayment and ability to meet your plan.  

Collateral can be used as an asset against which a loan is secured, and depending upon the kind of loan, you can also borrow against the value of an asset. The type and value of collateral should align with the loan type and be sufficient enough to cover it if needed.

Collateral reassures lenders that they can recover losses if the loan isn’t repaid. 

A lender can take into consideration all the above factors, but a key component that could affect their decision is simply you – your credit reports, references, and their own experiences with you. Even if other criteria are solid, your reputation and conduct can carry significant weight. It’s equally important to find a lending partner who is reliable, trustworthy, and understands the nuances of your industry.

If you’re starting, growing, or restructuring a business, Pathward’s commercial finance team may be able to help. Fill out our contact form and tell us about your financing needs. A representative will follow up to see if we’re the right fit for your goals.