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Planning to apply for a business loan? No matter where you apply, the lender or bank receiving your application generally follows the same review process. This review includes the “5 C’s of credit.” These characteristics of credit are used to evaluate your potential as a borrower.

Understanding the “Five C’s of Credit”

Familiarizing yourself with the five C’s—capacity, capital, collateral, conditions and character—can help you get a head start on presenting yourself to lenders as a potential borrower. Let’s take a closer look at what each one means and how you can prep your business.

  1. Capacity. Likely the most important of the five, capacity is your business’ ability to repay loans. Make sure your business plan demonstrates steps to repay any loans you borrow. Specifically, lenders look at revenue, expenses, cash flow and repayment timing and will look at your business and personal credit scores.
  2. Capital. The cash you put toward starting your business is called capital, and it’s a good way to show a lender how serious you are about success. It’s unlikely that you’ll be able to finance 100 percent of your startup or acquisition costs, so to get a loan, you’ll need to make an investment in your business first. This may come from deposits or money from other sources.
  3. Collateral. When evaluating a loan application, a lender will generally look at collateral as a secondary source of repayment for the loan. They’ll want to make sure that if the loan payments stop for some reason, they can recover what they’re owed through collateral. This could be equipment, vehicles or inventory. The loan amount will be based on a percentage of the collateral’s value, which is called the loan-to-value ratio (LTV). Different types of collateral have different LTVs.
  4. Conditions. Be prepared to demonstrate that there’s a market for your business and a clear purpose for the loan. Base your arguments on the local, regional and national economy, the competitiveness of the business, the type of industry and your experience in it, and your experience managing a business.
  5. Character. The final C includes a look into who you are as a borrower, including your educational background, business experience and personal credit history. Your personal credit history is important because you may be required to personally guarantee the loan. Statistics show that the way a person handles personal credit generally indicates how he or she will manage business credit. Any references or other background information you can provide will be considered. It helps if you and your employees have experience and a positive reputation in your business’ industry.

Why Are They Important?

The five C’s of credit provide an objective, big-picture framework that your credit union, bank, lender or underwriter can use to determine your eligibility for a loan. They outline the basic structure of credit analysis—the method used to determine your creditworthiness—and can make a big impact on the loan approval process.

Before applying for a loan, answer the following questions:

  • Is my business in compliance with all local, state and federal laws and regulations?
  • Have I researched and evaluated my competition?
  • Am I providing a viable product or service despite the competition?
  • Am I committed to making my business succeed?
  • Am I familiar with the 5 C’s of credit?

Business Plan Help

Create a business plan that demonstrates your knowledge of your market before applying for a business loan. For help developing a plan, consider turning to the people at your local Service Corps of Retired Executives (SCORE) office or visit them online at SCORE.org. For little to no cost, SCORE will help you formulate your ideas into a business plan.

Navy Federal’s Business Solutions is focused on providing the very best tools and resources to members. Learn more about getting a loan and reaching your goals with Business Solutions.


This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.