Lenders can’t know for certain whether a prospective borrower will repay their debt. Instead, banks and other financial institutions rely on applicants’ financial backgrounds to estimate risks before offering them a loan or a line of credit. For individuals and businesses alike, a credit score is an opportunity to make a good impression. However, lenders don’t have to count on credit scores alone. Additional information can give them a more complete view of your business’s background.

The 5 C’s of credit are another framework lenders use to determine individuals’ and businesses’ creditworthiness. They go deeper than credit scores to provide a more holistic picture of a person or business’s financial well-being. The 5 C’s—capacity, capital, conditions, character, and collateral—offer insight into your history and specific financial circumstances. When you apply for a loan, credit card, or line of credit, lenders use these measures to determine eligibility, loan amounts, and interest rates.

Key Considerations

Lenders may use the 5 C’s of credit—capacity, capital, collateral, conditions, and character—to evaluate creditworthiness.
You don’t have to excel in all 5 C’s. In many cases, strength in one category makes up for weakness in another.
Ways to improve your chances of approval for a loan include maintaining responsible credit habits, offering collateral, and providing character references.

Understanding the 5 C’s of Credit

While lending partners may have different priorities within the 5 C’s of credit, many rely on this framework to make application decisions. That doesn’t mean your business has to perform perfectly in each category. But understanding the 5 C’s of credit can help you determine your company’s financial strengths and weaknesses so you can be better equipped to qualify for the best financing options and interest rates.

Capacity

Capacity is a measure of your business’s financial ability to take on and repay new debt. Before a lender offers your business a loan, they want assurance that you’ll have the means to make regular payments on time throughout the repayment period.

The debt-to-income ratio often determines capacity for personal loans. When it comes to small business loans, however, lenders are usually interested in overall monthly revenues, expenses, and debts. Capacity depends on your business’s overall income relative to all your business debts and operational expenses, not just the loan you’re applying for.

To determine your business’s capacity for a new loan or line of credit, lenders may look at your loan statements, monthly revenues, operating expenses, accounts receivable, and accounts payable.

Taking the following steps may help you improve your business capacity:

Pay down existing debts to make room in your budget for more monthly payments.
Increase revenue by expanding your market or (when applicable) increasing prices.
Audit your business expenses and cut unnecessary costs wherever possible.

Capital

Capital refers to your business equity, the amount of money you’ve invested in your company. Lenders use capital to evaluate a business owner’s confidence in their venture’s success. A significant capital investment demonstrates your belief in the company’s profitability.

Capital also serves a practical purpose. A business with significant capital investments may be less likely to default on a loan, even if revenue falls short.

If you’ve made a major investment—like launching your business using your own savings—you may be more likely to qualify for a business loan. On the other hand, if your company already relies on loans to operate, lenders may not feel secure extending credit.

Taking the following steps may help you improve your business’s capital:

Invest your own money in your company before seeking a loan.
Track all your existing investments, including supplies you’ve personally paid for.
If you’re applying for financing to cover a specific purchase, make a down payment out of pocket.

Collateral

Collateral refers to any asset that your business uses to secure a loan. If your company defaults on a loan, the lender may seize the collateral to recoup their losses. Your business may have to provide documentation confirming the value of the asset you put forth as collateral. That value plays a significant role in determining your loan amount, interest rate, and terms.

If you’re financing equipment, inventory, or real estate, the purchase itself may act as collateral. Defaulting on a secured business loan could mean parting with a vital part of your business operations.

Some loans are lower risk. For example, unsecured loans don’t require collateral. Keep in mind, however, that these loans may have higher interest rates than secured loans.

Taking the following steps may improve your business’s collateral situation if you’re considering using collateral to secure a loan:

Identify potential assets for collateral.
Budget for higher payments on unsecured loans due to interest.

Conditions

Conditions are a snapshot of the circumstances surrounding your loan or credit card request. When lenders consider your application, they assess the overall state of the economy, trends within the industry, your company’s individual status and performance, and the reason you’re applying for a loan.

While some of those conditions — like general market performance and the health of the economy — are out of your control, you still have power over the financing decisions you make for your business. For example, if businesses throughout your industry are struggling to find and retain customers, you may not want to apply for a loan to open a second location. On the other hand, if the economy is thriving or your company meets a niche with growing demand, lenders may be more likely to approve more ambitious loan applications.

Taking the following steps may improve your business’s conditions:

Assess your business’s performance and budget before applying for a loan.
Apply for financing when the market is trending positively.
Meet performance or revenue goals before applying for a loan.

Character

Character refers to a lender’s general assessment of your business’s overall creditworthiness. Basically, your character determines whether a lender believes your business is likely to repay a debt based on previous behavior.

Lenders typically rely on credit scores to determine an individual applicant’s character. For businesses, character may be a little more complex. Business credit scores can play a role in lenders’ perceptions of their character. However, not all businesses have credit scores. To create a credit file, your company must be an established legal entity with a federal tax identification number and a Data Universal Numbering System number. Even then, building a credit history takes time.

Many other factors may influence your business’s character, including the business's age and reputation in the industry, history of managing debts, the business plan, management experience, and even owners’ personal credit scores. Character is vital, but it’s also somewhat subjective. A lending partner’s priorities might shape how they measure your business’s character, so it can help to get a sense of a lender before you apply.

Taking the following steps may improve your business’s character:

Establish and build a business credit history.
Make all existing loan payments on time and pay down balances.
Improve your personal credit score.
Collect positive character references from lenders, suppliers, and business partners.

Explore Business Loan Opportunities with BHG Financial

With small business loans from BHG Financial, you can use our commercial financing for up to $500,000^1,2to meet goals like business acquisitions or to access working capital for operational needs like inventory with terms up to 12 years¹. Plus, our dedicated, U.S.-based concierge service can guide you through the process if you’re new to business credit and address concerns. Get started by taking a moment to view your personalized estimate using our payment estimator. 

5 C’s of Credit FAQs

Which of the 5 C’s of credit is most important?

There’s no one C of credit that’s more important than the rest. Lenders may prioritize the 5 C’s of credit differently, and excelling in one area often makes up for faltering in another.

¹Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Finance amount may vary depending on the applicant's state of residence.

² BHG Financial business loans typically range from $20,000 to $250,000; however, well-qualified borrowers may be eligible for business loans up to $500,000.

Business Loan Repayment Example: A $94,695 commercial loan with a 9-year term and an APR of 14.8% would require monthly payments of $1,633.

No application fees, commitment, or impact on personal credit to estimate your payment.

For California Residents: BHG Financial loans made or arranged pursuant to a California Financing Law license - Number 603G493.

IMPORTANT INFORMATION ABOUT ESTABLISHING A NEW CUSTOMER RELATIONSHIP To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies every customer. What this means for you: When you apply for a loan, we will ask for your name, address, date of birth, social security number and other information that will allow us to identify you. We may also ask to see your driver's license or other identifying documents. If all required documentation is not provided, we may be unable to establish a customer relationship with you.