The Five Cs of Credit Analysis

Your business is looking to invest into a few new projects. These projects seem to be profitable, but the start up fee is out of range. What’s the first move? 

Many would believe the first step here is to get a loan, but that’s not quite right. First thing to do is check your 5 Cs. What are the 5 Cs? They’re what lenders supplying the loan will analyze before they decide if you should get a loan. The 5 Cs asses a range of things from surface level business criteria to personal characteristics. It is of high importance to ensure that these five criteria are stable not only in order to receive a loan, but for the financial health of your company. 


Assessing character in the realm of credit is another way of determining credit worthiness. Essentially, lenders align your credit score with your character as a business or individual. Credit scores, also known as FICO scores, are decided based on information gathered from a number of different credit bureaus. Lower credit scores represent negligence in paying bills, lack of responsibility, or just lack of funding. This means that on the other end, having a high credit score shows you’re more capable of repaying a loan which is far more promising.

Lenders can look at more than just your credit score when determining character. They may even look into a more personal scope to get a better picture as to who they’re dealing with. This can include things such as your educational background, business experience, the industry you’re in, and the quality of your references. They don’t really care if you’re a good person, they just need to be sure you wont put them in debt.


Capital is based on the net worth of the borrower. In terms of buying a house, the sum of your down payment is the size of your capital. In terms of the business world, the money you put towards starting your business is your capital. Paying for something such as a costly start up project in full is unlikely, so if were being practical, a loan is necessary. But, putting more capital upfront gives you a better chance of receiving your desired loan. 


Capacity may be the most important of the 5 Cs in the eyes of lenders. Lenders need to be sure that whoever is borrowing their money has the ability to pay it back. This refers to business or individual income. They need to ensure that your level of income is going to be enough to afford loan payments.

To analyze this, lenders will look at a metrics like your debt-to-income ratio and debt service coverage ratio. Cash flow also plays a large part in the assessment of capacity. Lenders need to be able to verify that your cash flow is stable and comes from a profitable source.


Collateral is exactly what it sounds like. Say something comes up, you’re unable to make the payment on your loan. The lender will take whatever you offered up as collateral. This can be a wide variety of different things. Assets such as real estate, inventory, a vehicle, or equipment can be pledged as collateral. Whatever it is must follow the loan-to-value ratio.


The final C out of the 5 is concerned mostly with outside factors. The economy  surrounding your industry as well as the economy in general, the survival rates for your type of business, size of the loan, and interest rate are all outside factors that lenders consider. They also take into account even more specific aspects such as how you intend to use the loan, how your competition is doing, and overarching issues within your industry

Overall, assessing your 5Cs as an individual and as a business should be a regular practice. It ensures that your company has the ability to make large expenditures if needed, and also raises your chances of receiving a loan. Your companies financial health should always be a priority, and analyzing your 5Cs proves as an easy way of securing stability.