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Lenders consider several factors when reviewing your SBA loan applications. The 5 C’s of Credit refer to five criteria that lenders look at to decide if they should give you a loan.
Each C is a different factor that helps lenders get a clear view of your financial position to take on business debt.
The 5 C’s are:
Your trustworthiness, credit history, dependability, and financial responsibility are a measure of character.
Lenders want to loan money to business owners who have a proven track record of paying loans back, not missing payments, and have high credit scores.
Good credit reports and a high personal credit score are essential and cannot be overlooked. A credit score of at least 700 is preferred.
Another factor in determining creditworthiness is examining the credit utilization ratio. It is preferable for the ratio to be 30% or less. So, if you have a balance of $2,000 on a credit line with $10,000 available credit, that shows responsibility. However, if you carry a balance of $8,000 on the same $10,000 credit line, this would not be a good measure of your creditworthiness.
Capacity refers to your ability to pay the lender back and is determined by comparing your income to your expenses. If your business has high expenses and a low income, a lender is unlikely to approve a loan.
Lenders review:
A profitable business and a demonstrated ability to manage debt are key to showing lenders that you are able and likely to repay a loan.
Capital describes your personal financial investment in the business. Lenders want to see that you are committed to the company’s growth by contributing funds. If you have nothing to lose, you might not care as much about making the business succeed. But if you’re putting up some of your own money, then you’ll work hard on your business.
Collateral is an asset used to secure the loan. It can be tangible or intangible assets that you agree to give to the lender in the case of default. If you do not pay the lender back, the lender can sell the asset to get their money back or minimize the loss.
Examples of what can be used as collateral include:
Conditions refer to external factors that may impact your business’s ability to repay a loan. Lenders consider:
A detailed business plan can improve the chances of approval, as it shows lenders that the money is going to a business that has done its homework and is likely to succeed.
At Business Funding Group (BFG), we have decades of experience helping business owners secure SBA loans to fund their business growth. We understand what criteria lenders care about most, which is explained by the 5 C’s of Credit.
If you understand the criteria that lenders consider and work to address any issues before applying, you can increase your chances of getting a loan approved.
We can help with all aspects of your loan application, and we stay with you until you have a fully funded loan. Contact our office to learn how we can make sure your business is well-positioned for an SBA loan approval.
(917) 593-5013