The 5 Cs of Credit for Business Borrowing

July 20, 2022

Whether you operate in manufacturing or logistics, entertainment and hospitality, renewable energy or another field,  adapting to a changing economic climate is essential. Securing appropriate liquidity to take your business forward can be a crucial part of that. 

Your funding options might include Small Business Administration (SBA) loan, conventional loan, equipment financing or a loan against assets like inventory or accounts receivable. And while economic instability and market volatility could lead some business owners to assume that it’s not the right time to approach lenders, studies show that’s not necessarily the case. 

In fact, in fiscal 2021, two SBA lending programs — SBA 504 loans and SBA 7(a) loans — made more than 61,000 loans totaling $44.8 billion to small businesses nationwide. In 2020, Reno-area businesses secured just under $727 million in small business loans, according to Community Reinvestment Act reports

Yet, while funding is available, the National Small Business Association reports that more than 25% of small-business owners have trouble accessing it. For your business to shine in the financing application process, you can turn to your banker as a trusted teammate. 

A thorough evaluation of borrowers’ credit is one way lenders mitigate lending risk. Based on several factors — known as the Five Cs of Credit — the bank determines the outlook for a borrower’s prospects. Before you begin the process of seeking financing, consider polishing up your application by considering the Five Cs. 


In general, banks view loan applications that list collateral more favorably than those without it. Banks often mitigate lending risks by securing a commercial loan with assets put up by the borrower. Not only does the presence of collateral tell a bank that your business has a solid foundation, but it assures the lender that there is an avenue to recoup losses in the event of borrower default. Equipment or accounts receivable can serve as collateral to secure a loan.


In making lending decisions, banks take many broader circumstances into account. These may include interest rates and the strength or weakness of the overall economy. Bankers also consider the reason a borrower wants the loan, whether for working capital, equipment or expansion. While you can’t control the backdrop of current economic conditions, you can do your best to create a strong application from the specific circumstances pertaining to your business. 


Across the board, it’s a good idea to apply for only the credit you need. You may wish to examine your business debt-to-income (DTI) ratio, as banks may be prohibited from issuing loans to borrowers with a DTI of 43% or higher. When assessing a loan application, banks look at your capacity to repay the debt, and DTI ratio is an important facet of that assessment. The bank may also review your company’s cash-flow statements to determine income from operations and may analyze the amount of debt outstanding compared to the revenue you expect to generate each month.


Do you maintain a healthy cash reserve? Envisioning that there might be a time when company revenue won’t cover the debt, lenders know that capital can be a way to keep making regular payments. Lenders also assess your company’s balance sheet and consider how much the business owner has invested in the company. Borrowers with a financial commitment to their company typically have a strong incentive not to default on a loan. 


Lenders can get a sense of your character and reliability as a borrower by looking at how you have managed credit in the past. Have you built a strong credit history of timely payments and responsible credit utilization? Is there a bankruptcy in your history? A strong credit history lets the bank know you may be a good candidate for a loan. Part of this assessment includes a review of your personal credit score. If you know your score could use some polishing, it’s a good idea to work to raise your score before applying for a business loan.

Even in uncertain times, financing is out there for the prepared and well-informed business owner. By focusing on the Five Cs of Credit, you can increase your odds of obtaining the capital you need when you need it. Your expert banker is a trusted business adviser, just like your accountant or attorney, who can help you think through your options and opportunities. To learn more about how a loan can enable you to achieve your business goals, contact your First Independent Bank relationship manager. 

All offers of credit are subject to credit approval, satisfactory legal documentation, and regulatory compliance. Borrowers are responsible for any appraisal and environmental fees plus customary closing costs, including title, escrow, documentation fees and may be responsible for any bank fees including bridge loan, construction loan, and packaging fees.