Latest

The Five C’s For Making Your Business Credit-Worthy

October 31, 2021
By James Gussie

A good credit score is an important factor to consider when starting a business or expanding your existing company. Find out how you can improve your odds of being approved for loans, setting up accounts with banks, and more by understanding the five C’s that go into creating a strong credit report.

The “5 cs of credit examples” is a blog post about the five C’s that are necessary for making your business credit-worthy. These are Capital, Cost, Credit, Competence, and Customer Satisfaction.

Every firm must seek funding at some point to meet its expanding demands. A loan may often make the difference between making it to the next level and falling behind your competition, whether it’s to acquire new equipment, purchase property, enhance an existing site, or just give your firm some breathing space. Unfortunately, the world of finance, particularly when it comes to company loans, can be a little complicated. There are so many variables to consider. Knowing what those factors are may make all the difference in whether you are accepted or not.

On the fifth edition of The Bcast, Bplan’s official podcast (at 12:56), Peter and Jonathan explore why company credit matters with Levi King, founder and CEO of Creditera: Subscribe to The Bcast on iTunes by clicking here »

When a lender evaluates a firm for a loan, there are five primary factors they take into account. Lenders use what are known as the “Five C’s” to gain a thorough view of a company’s health, potential, and credibility before agreeing to fork over thousands (and occasionally millions) of money. The Five C’s are as follows:

Table of Contents

1. Personality

The borrower must show that he or she is a person of good character. This entails maintaining a good credit score with few to no bad marks and a consistent payment history. Before you apply for a loan, get to know and comprehend your credit report (not just your score, the data too). You must take all of your financial commitments seriously as a borrower. Even the tiniest fault might cause enough uncertainty in the borrower’s mind to sway their choice in your favor. In addition to litigation and personal bankruptcy, professional history such as job experience proven in the company to which you are seeking for a loan is evaluated under character. When considering a loan request, the SBA takes into account other factors such as criminal history, citizenship, and legal status in the United States. It does not imply you are disqualified because you have committed an infraction or are a lawful permanent resident filing for citizenship; nonetheless, you must be forthright and honest about your history.

2. Flow of Cash

There must be sufficient cash flow to repay the loan while also allowing the borrower to pay for any other business and personal obligations. The same may be said for new firms, established businesses, and expected expansion. Between what goes out (expenses) and what comes in, there has to be a healthy margin (revenue). It is critical to have and comprehend financial statements in this regard. If you don’t have them yet, there are several resources available to assist you in obtaining them. If finances aren’t your strong suit, make sure you have someone on your team (either employee or a vendor/professional, such as a CPA) who can take care of them.

3. Supporting Documents

Collateral refers to assets that the borrower pledges to the lender in the event that the loan is defaulted on. The lender will look at corporate assets first, but if they aren’t adequate, personal assets will be considered. This implies there’s more on the line than simply repaying the loan (providing you an incentive to pay on time, every time).

Lenders take a lien on the subject collateral, which means that if you don’t pay, they may seize it and sell it at auction or sell the note to someone who would. This permits the lender to recoup all or part of their loss.

4. Use of capitalization

All corporate resources, such as fixed assets, retained profits, and owner’s equity (cash)—basically all collateral (less debt against said collateral) plus liquid holdings and earnings—are included in this component. Borrowed money, such as those from the seller of the property you’re buying, aren’t taken into account and don’t help the borrower. Cash is essential for both business and personal purposes. Lenders refer to cash and equity as “skin in the game,” since it shows you’re serious about your company and are just as invested, if not more, than the lender is. How can you expect a perfect stranger (lender) to be vested if you aren’t?

5. Situations

Factors outside of the company are also taken into account. Market circumstances, rivals, and industry developments that may effect long-term revenue growth all have a role in the company’s capacity to repay. Prepare to demonstrate how you distinguish from your competition, how you will weather market swings, and how you are adjusting to industry developments.

In the end, lenders have the authority to examine anything that they believe may damage your capacity to pay. Before speaking with your lender, be sure all five C’s are in good working order.

The “condition in 5 cs of credit” is a guide that was created by the Small Business Administration. It outlines five components that should be present for any business to be considered credit-worthy.

Frequently Asked Questions

What are the 5 Cs of credit rating and maintaining credit worthiness?

A: The 5 Cs of credit rating and maintaining credit worthiness are Cash, Credit Cards, Car Loan (vehicle), Consumer Debts (student loans) and the Cost of Living. To maintain your good standing with these things in mind; keep them all to a minimum.