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Cs of Credit: Why they are 'critical' for your business

It is essential for you, as a small business owner, to know the main factors a lender focuses on while gauging a company’s creditworthiness. Once a lender feels that you have a robust business plan and a strong record of business performance, they will move on to evaluating other equally imperative parameters which are explained as the 5C’s of Credit.

Most lenders will evaluate your creditworthiness based on the 5Cs Model: Character, Capacity, Capital, Collateral and Conditions.


Managing your lending transactions and relationships well is the key to being able to access finance at reasonable rates. For example, if several loan applications are made over a short time span, or if you have been rejected for a loan in the past, it may have a negative impact on your credit score. Missing a payment or defaulting in the past may also turn out to be unfavourable for your credit report. Additionally, lenders check if there are any lawsuits filed against you. It is essential to have a strong credit score, both personal and professional, in order to show the lender that you have a strong financial history and are an attractive loan candidate.


Lenders evaluate the capability of a borrower to pay back the principal amount of a loan, in the form of monthly instalments. They will generally look at the amount, stability and frequency of your income, employment or business history and outgoings to estimate your capability to pay back. The lender also considers your debt to income ratio, to gain an understanding of the amount of debt you have in comparison to your income. It is absolutely necessary for you to have supporting financial information in order to demonstrate your ability to repay the loan.

Contributed Capital

Lenders look at the personal cash contribution made by the owner of the business to his or her business. If you have invested some of your personal wealth/savings into your business, then a lender may be reassured about your dedication to the business, and comfortable to lend money for business growth. A material contribution of funds into the business by a borrower increases the likelihood that the borrower will try and prevent default. This is why lenders focus on the Debt / Equity (contributed capital) ratio.


Businesses often pledge collateral in order to obtain a loan. A lender will assess the collateral a borrower pledges, and based on its value will consider the loan amount and rate at which they are willing to lend to your business. Please note that loans without collateral (unsecured loans) are also available but these are available at a higher interest rate.


Various conditions such as the economic, political environment and business are considered while making a loan. It is always advisable to be aware of such external circumstances as this could impact the timing and amount lenders are willing to disburse.

All the above parameters are considered to evaluate your ability to borrow. Using these 5Cs you can understand how you and your business measure up in each category. Now that you know these factors, you can apply them to your business and become best prepared to begin the loan application process.

Always keep in mind that a simple and concise presentation of facts and figures will reinforce your case, and improve your overall attractiveness to a lender.