Money Smarts Blog

With growth and expansion in mind, access to credit as a business owner is essential. The common problem is many entrepreneurs focus solely on their business operations, but often at the detriment of long-term strategic growth planning. As a start-up, you may be fighting for survival on a day-to-day basis — but what about 2-3 years down the line when most banks or credit unions consider you a seasoned professional? At this point, you may have also reached the end of friends, family or personal funds available to support the growth of your business. 

What financing options are available to help businesses hire additional staff, obtain a bulk discount on inventory or purchase a building to own instead of lease? Regardless of the reason, there are several common factors that a financial institution will use to determine their willingness to lend you money.

5 C’s of Credit is often used as the all-encompassing term for how lenders gauge the creditworthiness of potential borrowers.

“The 5 C’s are all very important but we are now starting to dig deeper. Those looking to finance your business are going to ask additional marketing type questions such as (the size of your market, trends, target customers, competitive differentiation, etc.). We want to understand if the business has a sustainable revenue stream and a strong defendable market position.”

1. Character – Your willingness to pay the loan back
   Determined primarily from the personal credit score of all 20% and greater owners. Don’t forget you have a business credit report — Dun & Bradstreet is the most widely used service.
2. Capacity – Your ability to repay the loan
   Determined by your financial statements (personal/business tax returns, Income Statement or P&L, Balance Sheet, Personal Financial Statement, etc.).
3. Capital – What’s your skin in the game?
   Determined by the amount of personal or investor funds that have contributed to the business.
4. Collateral – Secondary source of loan repayment
   This includes Real Estate, Accounts Receivables, Equipment, etc. Collateral is important but is often a secondary consideration and should enhance an application rather than be the sole reason for approval.
5. Conditions – What other factors could affect your ability to repay?
   This could be local, national, global and/or geopolitical issues. An extreme negative example is the impact COVID made business owners. A positive example could include a local business owner who’s either been in operation forever or recently has been recognized. The conditions can often add color to an application that is filled with black and white.

Now that you have a better understanding of what will impact a lending request, what options are out there? We've put together a worksheet of three of the most common lending solutions.

3 most common lending solutions overview