The 5 C’s of Credit – What Every Lender Looks At

I often get asked the question, “What are Lenders looking for when they lend you money?”

The simple answer: “The key to every lending decision rests on the RISK involved.”

As the risk increases, so will the terms and conditions of the loan. As the risk decreases, the lender can be more flexible.

Each lender or supplier of finance has a different appetite for lending and a different way to assess loan requests. The foundation for every loan decision will always start with the “5 C’s of Credit “:

The character and integrity of the applicant is of utmost importance. If you were to lend money to someone, you would want to make sure that they had paid prior lenders back (and on time). This is why your credit history is reviewed on both sides: business and personal. How you treat your past suppliers of finance is an indication of how you will treat future suppliers of finance.

Requests for finance need to be for a specific purpose. Whatever the purpose is, you need to be able to provide some sort of security. For example, a business may be growing and need to purchase a building.
Purpose: purchase of building
Collateral: building (and usually a few more items)

Conditions include: interest rate, amortization, terms, down payment, etc. Conditions are determined by the purpose of the loan, the trending of the industry, economy and the risk of the business. As the risk increases, so do the conditions.

A business needs to show that they have sufficient cash flow to pay back the funds that they are requesting.

The business needs to show both capital inside the business AND the ability to further inject capital into the business.

This is a very quick snapshot of how lenders review financing requests. As a business lender, Women’s Enterprise Centre (WEC) also looks at these 5Cs as part of its due diligence. WEC can offer loans up to $150,000. To find out more about WEC business loans, please join us for our weekly Business Loan Information Session (BLIS).

Rita Kim

Rita Kim is a Business Advisor in the Vancouver office of Women’s Enterprise Centre. She operates her own business that structures growth and finance for entrepreneurs, so she knows first-hand what it’s like to be an entrepreneur. Prior to supporting Women’s Enterprise Centre, Rita held a variety of roles involving retail, consulting overseas and working at various financial institutions, serving hundreds of businesses, across industries, for the past decade. She holds a Bachelor’s in Cell Biology and Genetics from UBC and is a Certified Trainer and Facilitator.

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