Banks Evaluate the 5 Cs of Credit Before Approving Commercial Loans

Commercial loans are issued to various types of business entities. These loans are typically utilized to assist in areas where short-term funding is needed immediately.

These areas may include operational costs, purchasing of much-needed equipment, payroll, or to obtain items that are necessary for the processes of production and manufacturing.

While obtaining this type of loan is – for the most part – a financial transaction between you and the bank that you elect to use, it is also the formation and development of a long-term relationship between you (the borrower) and the financial institution (the lender).

The bank that you choose to work with is directly responsible for making decisions that are considered to be consistent with the parameters and the limitations of their business. As a result of this fact, banks will test each commercial loan applicant against five basic lending criteria. These are referred to as the “5 Cs of Credit”. In this brief post, you will learn about the 5 Cs of credit.

1. Capacity

The first of the 5 Cs of credit is “Capacity”. In essence, this is your ability to successfully repay the loan that you are requesting. One of the best methods for establishing your capacity to repay the loan is to present a business plan and all cash statements associated with your business. The financial institution that you are applying to will want to see exactly how the capital repayments and the interest are going to be paid over the entire term of the loan.

2. Capital

The second of the 5 Cs of credit is “Capital”. Basically, this is the value of the net worth of your company. This is where you will need to present your personal net worth. This will allow the bank to see your commitment to the overall proposal.

3. Collateral

“Collateral” is the third component of the 5 Cs of credit. This will show your ability to provide a guarantee to the loan and your company’s ability to convert the assets into cash within a small time frame.

4. Credit History

“Credit Hitory” is the fourth component to the 5 Cs of credit. This provides a quick glance at how you and your business have handled financial issues and dealings in the past.

5. Character

The fifth and final component of the 5 Cs of credit is “Character”. It is essential that the bank be able to establish that you demonstrate integrity and a high level of trustworthiness.

Business lending is rather subjective, in nature. The 5 Cs of credit are considered to be quantifiable elements that are evaluated by a lender. In addition to these 5 criteria, many loans may be made based on the comfort level that has been forged between you, your business, and your bank.