Key takeaways

  • The five C’s of credit are capital, character, collateral, conditions and capacity
  • Every bank has its own underwriting criteria, but many use similar standards to evaluate creditworthiness
  • You may be able to increase your chances of getting approved for a loan if you offer collateral and a personal guarantee

It’s no secret that banks check your creditworthiness before approving a loan application. While many lenders have different requirements for business loans, most lenders rely on a similar set of principles, known as the five C’s of credit. Keep reading to learn more about the five C’s of credit and how they impact small businesses and business loans.

What are the 5 C’s of credit?

The five C’s of credit are character, capacity, capital, collateral and conditions. Although lenders’ eligibility requirements vary, most use the five C’s of credit to determine the creditworthiness of those applying for loans — whether that’s for personal or business reasons.

Why are the 5 C’s important for business owners?

Business financing can help owners with everything from emergency expenses to purchasing assets. Understanding the five C’s of credit can improve the likelihood of getting the funding your business needs, potentially with a lower interest rate.

Ignoring criteria could limit your chances of obtaining the best small business loan for your needs, potentially resulting in a higher interest rate and less favorable terms. That said, every lender will weigh the five C’s differently, so knowing where your business may need to improve and a lender’s eligibility requirements can help you reach your financial goals.

1. Character

Your business character refers to a lender’s overall impression of your credit. Lenders look for things like repayment history and time in business to determine if a business owner can be trusted to manage a new business loan. Specifically, a bank may look to answer questions like:

  • How long have you been in business?
  • What is the owner’s personal history of paying debt on time?
  • What is the business’s history of paying debt on time?
  • How much experience does the owner have in their industry?

How to improve

  • Use a business credit card responsibly to establish a positive credit history
  • Make any current debt payments (both personal and business) on time
  • Build a relationship with a lender using a business checking account or other financial product

2. Capacity

Capacity refers to your business’s ability to repay a loan. Lenders are more likely to approve a loan if they’re confident that your company has enough cash flow to take on more debt. A bank may consider not only how your business is doing right now but also the revenue you’re predicted to make in the future.

For instance, a lender may consider cash flow statements, the number of active customers/contracts for your business, debt-to-income ratios and current or past debt delinquencies. You could be disqualified from getting a loan if you have a history of defaults, business bankruptcy or late payments.

How to improve

  • Continually grow your cash flow and work to boost revenue
  • Build business credit by paying on time
  • Pay down old debt before applying for new debt
  • Have reports that show your earning potential based on incoming contracts or new product lines

3. Capital

Capital refers to the amount of financial investment the business owner has made in their own venture. As a general rule, lenders may look more favorably upon applicants who have made a significant personal investment before they apply for outside funding. This can often signal that the business owner takes their stake in the company more seriously.

While a bank will rarely advertise a minimum capital investment, it will often help your case if you’ve put some personal savings into the company.

How to improve

  • Use personal funds and explore other options before applying for a loan
  • Prepare to offer collateral in place of cash
  • Keep track of any business assets, such as equipment, that you pay for with personal funds

4. Collateral

Some lenders ask you to put up hard assets or working capital to secure a business loan. This is known as collateral. Collateral can be seized if you fall behind on a loan, which helps reduce the amount of risk a lender takes on. Hard assets include things like real estate and business equipment. Working capital collateral includes inventory and accounts receivables.

If you don’t have collateral, a lender will likely require a personal guarantee. This document acknowledges that the business owner will be on the hook for the loan if the company defaults on the debt.

How to improve

  • Make a list of available collateral, keeping in mind you can use physical assets on hand and future earnings
  • Offer to sign a personal guarantee

5. Conditions

Banks consider the general economic conditions when you apply and conditions related to your specific business. For instance, if you plan on investing money in a risky industry, you may be approved for less funding than going into a more stable and predictable business. Conditions also refer to whether your business is trending positively or negatively.

How to improve

  • Consider asking for credit increases when your business is in a strong position
  • Don’t apply for more funding than you need
  • Wait until the economy is trending up before you apply for a loan if you can; banks may be more generous with their approvals

Bottom line

Being mindful of the five C’s will give your small business a better chance of obtaining loan approval. If you can’t get a loan from a traditional bank, however, you’re not out of options. Online alternative lenders tend to have more lenient terms and often have a faster turnaround. You can also explore bad credit business loan options if you are having trouble getting approved for funding and don’t think you can improve your credit score immediately.

Frequently asked questions


  • The five C’s of credit are character, collateral, capacity, capital and conditions. These categories allow a lender to evaluate an applicant’s overall financial history and their likelihood of being able to repay the debt on time.

  • Each lender will have its own proprietary formula for determining creditworthiness. However, capital and capacity rank among the most important variables for many lenders as they offer information about your ability to repay.

  • Capital is the amount of money the business owner has invested into their company. A cash infusion would be considered capital and any equipment or real estate purchased with personal funds.