The Five C’s of Lending for Small Business Loans

The 5 C’s of lending for small business loans are Character, Cash Flow, Collateral, Capitalization and Conditions. 

1. Character

The basis here is the borrower’s credit report and his or her payment trends.

2. Cash Flow

There needs to be adequate cash flow available to repay the loan and allow the borrower to pay for all other small business expenses, including their personal needs. This is true whether calculating a business' previous experience or making projections for a small business expansion or a startup.

3. Collateral

These are the assets that the borrower offers to the lender to secure a small business loan in the event it is not repaid. The primary collateral will be the small business’ assets, but if these are not sufficient, personal assets may be required as additional security.

4. Capitalization

This consists of the small business’ resources including fixed assets, retained earnings, and the owner’s equity. Funds borrowed from a source such as the seller of a small business do not improve the equity position of a borrower.

5. Conditions

This refers to the outside factors that will be considered, such as competition and trends of similar small businesses in the industry.

Please email us for more information about the five C's of lending and small business loans.