When applying for a loan, lenders will evaluate your overall risk based on five factors: The Five C’s of Lending.
As a small business owner, it’s important to understand what they are and how they impact your lending profile.
1. Capital
Lenders will always check to make sure that you have some capital to your name when evaluating your profile, and that you have already invested money into your business. It’s important to show you have made a financial commitment in the past. This could take the form of personal savings, investments or other assets.
2. Conditions
Conditions can include the current state of the economy and how its impacting your particular industry. Lenders will also want to know how you plan on using the money, given the current economic conditions.
3. Collateral
For certain types of financing, business owners are required to pledge something to a lender as an alternative source of payment. Your collateral may vary, but could include accounts receivable, inventory, real estate or equipment.
4. Character
Your personal character is just as important as financial data when applying for a loan. A bank may hesitate to lend if you lack strong references, credentials or even communications skills. Remember, your own reputation is indivisible from that of your business.
5. Capacity
Capacity refers to your ability to repay a loan. Your revenue, debts, liquidity ratio, credit score, and other factors all come together to determine your ability to repay the financing support you may receive.
If you’re in the market for financing, make sure you have a strong grasp of your “5 C’s” to better prepare for your next loan application.
OnDeck is a Google Ventures-backed company with an A+ rating with the Better Business Bureau. The company offers small business loans nationwide to over 700 different industries. For more information about OnDeck small business loans, click here.