So, you’re thinking about expanding your business with new equipment. You know you want to finance your missions. And you’re curious how do lenders decide how much they’ll lend you and how do they establish my terms. Well, to put it simply they take a look at your five Cs of credit. Let’s learn in this article, what exactly 5 C’s of credit stand for.
The 5 C’s of Credit are:
- Capacity
- Capital
- Collateral
- Conditions
- Character
First let’s take a look at Capacity. Capacity is your ability to repay your loan. So, it’s no surprise that it’s the most important C of all. To determine your capacity, lenders look at how much cash you have and how you intend to repay the loan. Cash flow and sources of repayment are the main factors in establishing capacity.
Capital is the money you have invested in your business. The amount you invest in your business before approaching a lender can enhance your capital and qualify you for more flexible loan terms. Providing lenders with detailed cash flow projections and information about your business plan may also help you get the terms you’re looking for.
Next up is Collateral. Collateral guarantees another personal asset as a source of repayment if you can’t repay your loan. Otherwise, the equipment you are financing is the most common form of collateral. Sometimes it’s also beneficial to have a co-signer guarantee to repay the loan.
Conditions describe the circumstances affecting your loan. For instance – are you buying robotic automation equipment while wanting to have extra capital on hand for growth? How big will your down payment be and what kind of loan structure are you applying for? Conditions also describe economic legal and regulatory circumstances in related industries that can affect your business.
Last is character. It is evaluated through how you come off to your lender, how long you’ve been in business payment on prior loans and your relationship with the lender. It’ll say a lot about your Character.
Having said that, how to examine your Capacity, Capital, Collateral, Conditions and Character? How can you improve your credit score? Be sure to be upfront with your lender. If one or more of your 5 Cs needs improvement by providing high-quality complete information you already proved a level of responsibility and transparency. Many lenders will be happy to work with you to give you the loan. Make sure you have traceable history of income, credit and other financial attributes which will eventually increase the transparency. And most importantly never be a defaulter when you are supposed to pay back the loan.
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