How to be an Attractive Borrower
Have you heard of The Five C's of Credit? It is a classic banking industry guideline that lenders use when assessing the merits of a loan application. The Five C’s of Credit are Character, Capacity, Conditions, Capital, and Collateral.
At Community Futures, we also use these criteria when looking at loan applicants. However, unlike traditional banks, development is our top priority. As developmental lenders, we interpret and prioritize lending criteria differently. The strength of our lending is that we are considered ‘character’ lenders. This means we don’t just look at your numbers. We look at you as an individual! And, instead of looking to profit from the loan, we are concerned about whether your business plan has the potential to create jobs and stimulate economic activity in your community.
However, regardless of where you apply for a small business loan, you must be aware of the Five C's of Credit. Lenders use these factors to determine your loan approval and to set your loan terms. Read on to learn more about how Community Futures uses these guidelines to ensure businesses applying for loans are set up to succeed.
Character
When assessing a potential borrower, most lenders will look primarily at how the loan will be secured. While this is also significant to us, we find your personal experience and track record equally valuable. In the Five C's of Credit, this is called Character. We’ve listed it first because, at Community Futures, we consider character the foundational part of the loan application.
The kind of experience you have running a business and your training and work history in that field are valuable assets. And, because we know that even the most brilliant business ideas cannot succeed without strong management, we not only assess your character but also the character of your leadership team.
Capacity
Capacity has to do with your ability to pay back the loan. Traditionally, this is determined by your sources of income, stability of income, and your TDSR (Total Debt Service Ratio). When assessing your capacity, we at Community Futures want to see that you have carefully researched and thoroughly tested your business concept. In order to ensure that you can realistically afford the loan, we also want to make sure you have adequate cash flow. These are things you want to show in your Business Plan.
Conditions
The market and conditions in which your business will operate are very important when assessing a loan request. This will include the maturity of the market and what political, environmental, social, and technological issues currently affect the industry. While most of these conditions are external and out of your control, it is important to be aware so that you have a better idea of where you stand.
Capital
What do you have to invest in your business? Capital includes your personal and corporate net worth, the “sweat” and real equity you have invested in the business, and your ability to access other financial reserves.
Collateral
Collateral is a valuable asset that the borrower pledges in order to secure the loan. Banks start with collateral as the largest foundational piece. We do things the opposite way, which is why we’ve listed collateral last here. As ‘developmental’ and ‘character’ lenders, Community Futures places a greater focus on the management team, business capacity, market conditions, and cash flow of a business than on collateral or profit. Still, to lend money responsibly, we must take appropriate security when giving loans.
One of the many reasons to create and maintain an up-to-date business plan is to help you obtain a loan. When creating your Business Plan, consider the following questions. No matter the lender, your chances of obtaining a loan will depend on your performance in these five areas.
- How is my credit?
- What is my capacity to repay the loan?
- How much capital can I invest personally?
- How is my character?
- What kind of collateral can I offer to secure this loan?
Whether you are starting a new business or looking for a loan for an existing business, Community Futures offers financial support. Check out our Loans page to learn more. You can also schedule a one-on-one meeting with our Analyst. Contact us by e-mail at
Community Futures is here to assist you.
