The Five C’s of Credit

How does the Bank review your Small Business and its credit worthiness?

five basic components of credit analysis:

  • Capacity: How does your Small Business intend to pay the loan? What is your Small Business's borrowing history and track record of repayment? How much debt can your Small Business handle? The Bank will consider the cash flow from the Small Business, the timing of repayment, and the probability of successful repayment of the loan.
  • Capital: How well capitalized is your Small Business? How much money have you invested in your Small Business? Are you prepared to add more of your own personal money? How far will your Small Business's resources support both you personally and the Small Business as it is growing? How much capital you have invested in the business is an indicator of how much the Bank could have at risk if the business were to fail.
  • Collateral: While cash flow is the primary source of repayment of a loan, collateral represents assets that the Small Business would pledge as an alternative repayment source for the loan. Collateral can come in the form of real estate, equipment, accounts receivable and inventory.
  • Conditions: What is the purpose of the loan request? Will the money be used for working capital, additional equipment &inventory, or to purchase real estate? What are the current economic conditions that could be affecting your Small Business? What are the trends for your Small Business's industry? The Bank will do an assessment of the competitive landscape, industry specific issues, and the overall environment your Small Business is operating in to ensure risks are identified and mitigated.
  • Character: What is the purpose of the loan request? Will the money be used for working capital, additional equipment &inventory, or to purchase real estate? What are the current economic conditions that could be affecting your Small Business? What are the trends for your Small Business's industry? The Bank will do an assessment of the competitive landscape, industry specific issues, and the overall environment your Small Business is operating in to ensure risks are identified and mitigated.

In summary the Bank, through analysis of the your Small Business's credit worthiness, needs to determine:

  1. If your Small Business generates enough cash flow to service the requested loan & other debt obligations.
  2. If there is enough capital in the Small Business to weather the storm & to ensure the Small Business's commitment to its Small Business future.
  3. If there sufficient collateral to cover the amount of the requested loan as a secondary source of repayment if the business fails.
  4. Do conditions surrounding your Small Business pose any significant unmitigated risk, and
  5. Are you of sound character & can be trusted to honor commitments in good times and bad.

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