Understanding the 5 Cs is one thing—knowing how to use them to get a business loan is another. These tips may help you better use the five criteria to secure the capital your business needs.
1. Capacity
What to do: Show that your business can pay back the loan by maintaining financial records that track current cash flow, profits, and expenditures. Careful recordkeeping and solid financial management practices can help you demonstrate your company's ability to repay the loan.
Tip: Before applying for a loan through a bank, try to pay down any debts and calculate your current cash flow so you understand where you're starting from.1
2. Capital
What to do: Diligently save capital or profits that you can reinvest in your business, especially as you're starting out. By doing this, your lender can see that you have another source of revenue.
Tip: Invest money in your business and earn some profits before applying for your loan. This demonstrates your commitment to your business and your belief that you can make money from it.2
3. Conditions
What to do: Write a letter of intent to your lender that outlines why you need the loan and how you plan to use it.
Tip: It's hard to predict economic conditions, so it's best to be prepared. If possible, apply for a business line of credit when your business is thriving so you can use it later if you need it.1
4. Collateral
What to do: List all of your potential forms of collateral—such as equipment, fleet vehicles, or business-owned properties—that could help you secure a business line of credit or a loan. Include your assets' current fair-market value so a bank can accurately assess your business.
Tip: Some lenders want certain types of collateral—ask your lender what those are up-front.2
5. Character
What to do: Maintain open communication and transparency with your potential lender about your business practices and your employees' experience and qualifications.
Tip: Establish trustworthiness with your lender by sharing good business news with your banker, like if your business hits a monthly sales record or you've received compliments from customers on your employees' service. This can help lenders continue to see your business in a positive light over time.1
