The 6 C's of Business Credit (2024)

Whether you’re seeking a small business loan or business credit line, lenders will assess your application for financing based on six factors: capacity, capital, collateral, conditions, creditworthiness and character. Known as the “Six C’s” of credit, these elements combine to help lenders predict whether you can be relied on to repay your loan.

A Closer Look at the Six C's of Credit

Here is a closer look at each of the Six C’s, what they mean to lenders, and how they can impact your chances of getting a loan.

1) Capacity

Capacity measures your business’s ability to repay the loan. Lenders evaluate your capacity based on these factors:

• Financial Statements: Lenders want to see positive cash flow projections extending 12 months or more. They may also ask to see your balance sheet, income statement (sometimes called a profit and loss statement), and tax returns to evaluate your business’s financial health.
• Payment history: Timely payments to suppliers, vendors, and creditors show that your business has the money to meet its financial obligations. Lenders will also check to see how long your credit accounts have been open and your credit limits.
• Additional resources: Does your business have other cash reserves or resources you can tap to repay the loan if necessary?

2) Capital

Before lending you their money, the bank wants to see that you’re willing to put your money on the line. You are less likely to default on the loan if you risk losing your capital as well as theirs. How much of your own money should you put into the business? While the amount varies depending on the lender, you should be prepared to provide at least 10% to 25% of the capital needed for your goal.

3) Collateral

Even if your business suffers a cash flow slump, your loan still needs to be repaid. Collateral serves as security that if you cannot pay back the loan, the bank can seize and sell the assets you’ve pledged. Collateral can include equipment, machinery, inventory, real estate, accounts receivable or securities. If your business does not have sufficient assets to serve as collateral, you may need to pledge your personal assets, such as vehicles, stocks, or your home. Not all loans require collateral; however, pledging collateral may help you qualify for better loan terms or a larger loan.

4) Conditions

Conditions refer to the loan’s purpose and the economic climate. You may want a small business line of credit to see you through the off season, or a loan to buy equipment that will help you expand your business. Lenders will also consider the strength of the economy and the state of your industry. It can be difficult to get a loan in industries known for high failure rates, such as restaurants, or in industries that are stagnant, or in decline. Finally, lenders will assess your competition and the size of your market. You can’t control economic and market conditions, but demonstrating how you plan to address challenges and find opportunities can show you’ll succeed in spite of them.

5) Credit Scores

Lenders typically consider both your business credit score and your personal credit score when you apply for a business loan or business credit line. Before applying for financing, check your personal credit report and credit score as well as your business credit reports and business credit scores from each of the three major business credit bureaus: Dun & Bradstreet, TransUnion and Equifax. Each financial institution has its own lending criteria, so you may be able to get a business loan even with less-than-stellar credit. However, you may be limited to smaller loan amounts and pay more interest than you would with a higher credit score. If your business is relatively new and still building business credit, your personal credit score may weigh more heavily, and you may need to personally guarantee the loan.

6) Character

Character incorporates your business and industry experience. Your reputation in the industry and community is also a factor in how lenders evaluate character. Building personal relationships with bankers and others in the local community can go a long way toward demonstrating character. Other important elements of character are a history of timely payments to suppliers, positive references from trade creditors, and strong financial management skills. Does your behavior show you’re the kind of borrower a lender can trust?

Prepare to Find Financing With the 6 C’s of Business Credit