The 5 C’s of Lending

August 26, 2019 / John Myers - ISBDC Southeast

Small businesses often look to bank lending as a source to raise project capital. Some examples are

start-up costs, updating equipment, acquiring more space, and moving into new markets. Many growing small businesses are turned down for commercial loans simply because they have not put themselves in the lender’s shoes. Small business owners can use the 5 C’s of lending to increase their chances of being approved for a loan. The 5 C’s of lending are; Character, Capacity/Cash flow, Capital, Conditions,

and Collateral.



A lender will want to know if the business and the business owner has a reputation for honoring agreements, and paying back loans. Most often this is done by checking the borrower’s credit reports to see if the borrower has been late with payments, or defaulted on any loans in the past. It is important to note that the lender will look at the business owner’s credit report. Although it is important for the business to have a good reputation, there are no reliable business credit reports. It is not uncommon for

a small business owner to put all their resources into the business, and let their personal credit decline.

Then, when they apply for a business loan, they are surprised to be rejected on the basis of their personal credit report. Small business owners are wise to keep an eye on their personal credit reports.


Capacity/Cash flow

This one is simple: Does the business, or the business owner, have enough income to cover the debt?

In the case of an expansion, a small business will need to show 3 to 5 years of past cash flows, as well as

3 to 5 year future projections. This demonstrates to the lender that the business is able to make the loan payments. In the case of a start-up business where historical financial data is not available, a lender will often want to see another source of income. This can come from another business, investment, job, or spouse’s income. If you are looking to start a small business with a commercial loan, don’t quit your

day job.



Many small business start-ups are surprised to learn that lenders expect them to put in some money. Depending on the type of loan, and what the loan is for, a bank will usually only lend 75-90% of the

project amount. So, if you need $100,000 to start a business, you will most likely need $20,000 of your own money to get an $80,000 loan from a bank. Lenders will expect a small business to share the risk. Small business people are more motivated to work hard in their business if they have something to lose. Why put in any extra effort if the only risk is someone else’s money?



What is the loan for, and what are the economic conditions at the time? It may sound counter intuitive, but small businesses should apply for lending when conditions are strong. Banks like to lend to businesses that do not need the money. A small business that is borrowing money to stay open will have a more difficult time getting approved for a loan than a small business that is making money. Usually, lenders will loan for fixed assets like equipment and real estate more easily then intangible operating costs like inventory or payroll. Fixed assets can be used as collateral, the 5th C.



No small business person likes to think about failure. However, a lender will want to know how a loan will be repaid in the event the business defaults on the loan. Collateral are things of value the business or business owner owns that can be sold to pay back the loan. Collateral can be the equipment and property the business owns. Often lenders will want business owners to include personal assets, like their home, as collateral. Putting a home up as collateral for a business can be a deal breaker for many people who want

to start a small business. Collateral, like capital, is a way for the business owner to share the risk with

the bank.


The 5 C’s of lending are an easy way to gauge a small business’ likelihood of being approved for a loan. If a small business person thinks they may apply for a loan sometime in the future, they should consider the 5 C’s in decision making, and daily operations. If you are a small business, or are thinking about starting a one and would like more resources and information, please visit us at






Jon Myers is the Business Advisor for Southeast Indiana Small Business Development center covering Bartholomew, Jennings, and Jackson Counties.

Jon is a graduate of Ball State University and a native of Columbus, Indiana.

Jon started a restaurant and brewery in 2006, and he has been involved in service and hospitality management for nearly 20 years.