The 5 Cs of Credit for Business Borrowing

What are your business aspirations in the coming year? You may be planning to expand to a new location on the other side of Las Vegas, hire more employees to meet increasing demand or offer new services in response to changing economic conditions. Finding the right financing is a key component for many business growth moves — and the funds are out there to help businesses of all sizes achieve their goals. 

In 2020, banks in the Las Vegas-Henderson-Paradise metropolitan statistical area (MSA) issued almost $2.5 billion in small business loans, according to Community Reinvestment Act reports. Nationwide, two Small Business Administration (SBA) lending programs — SBA 504 loans and SBA 7(a) loans — loaned $44.8 billion to 61,000 small businesses during fiscal 2021. 

Researching the financing that could be available to you is a crucial first step. An SBA loan, conventional loan, equipment financing, or a loan against assets like inventory or accounts receivable are some options to consider. 

Your banker can be an essential partner as you navigate the process of financing your business goals. For any loan, banks mitigate their risk by evaluating borrowers’ credit. The review is based on several factors — known as the Five Cs of Credit — that help a lender determine the likelihood of a borrower defaulting on the debt. Here’s what to know about the Five Cs to prepare your business before beginning a loan application.

Character 

Banks make a character assessment based on the business owner’s credit history. This includes the types of credit accounts you have, how reliably you make timely payments, how much you have borrowed and repaid in the past, and whether there is a bankruptcy in your history. A strong credit history can make you a better candidate for a loan. When you’re preparing for this assessment, it’s wise to review your personal credit score. If you know your score could use some polishing, consider working to raise the number before applying for a business loan.

Capital

Banks review your company’s balance sheet to ensure that you keep some cash in reserve. This capital can assure lenders that you manage money wisely and have the resources to balance your loan against cash flow. Lenders also consider the business owner’s investment in the company, since a borrower with skin in the game typically has a strong incentive not to default. Finally, capital serves as a way to cover repayments if revenue should fall a bit short.

Capacity

Before approving a loan, banks assess a borrower’s ability to repay the loan. Your company’s cash-flow statements can indicate how much income you generate from operations. Bankers also analyze the amount of debt outstanding compared to the revenue you expect to generate each month. To maximize your options as a borrower, you may wish to keep your debt-to-income (DTI) ratio as low as possible and apply for only the credit you need. 

Conditions

Lenders also consider the broader circumstances surrounding the loan, including economic conditions, interest rates, and the strength of the business or industry. Bankers look at the loan’s purpose, such as working capital, equipment or expansion. While you may not have control over conditions in the economy at large, it can be helpful to be prepared to discuss how your business fits into changing conditions. 

Collateral 

One way that banks mitigate risk is to ask borrowers to provide collateral to obtain financing. Banks may reserve some loans for applications that have collateral. Collateral not only tells a bank that your business has a solid foundation, it also provides an alternative for a lender to recoup losses if the borrower should happen to default on the loan. Equipment, accounts receivable or other assets can fill this role.

Focusing on the Five Cs of Credit may put the capital you need in closer reach. As a trusted business adviser, like your accountant or attorney, your banker can help you think through your options and opportunities. To learn more about how we can assist you with making smart credit decisions, contact your Bank of Nevada relationship manager.