When deciding whether or not to offer you a small business loan, lenders usually look at the five C’s of Credit: Character, Conditions, Capacity, Capital, and Collateral.
Character is mainly comprised of your credit score, which gives the lender a good idea of how likely you are to repay the loan. But it also includes more personal considerations, like your education and business experience.
Conditions refers to the market conditions, including any competition and economic considerations. Writing up a business plan that takes all this into consideration will give your lender a better idea of whether your business can succeed.
Capacity takes into account your business’ cashflow to determine whether or not you’ll be able to pay your current bills in addition to the new loan. The lender will also look at your debt-to-income ratio which compares how much you currently owe compared to your monthly earnings. The lower your DTI, the more likely you are to qualify for a loan.
Capital refers to how much you can put toward your new investment. In general, the more capital you can contribute, the better the rates and terms that you’ll qualify for.
Finally, collateral is how you will secure the loan. Most lenders require you to guarantee the loan either with something you already own, or with whatever you plan to purchase with the loan. That way, if you default on the loan, the lender has a way to recoup the money.
Lenders generally look at a combination of all five C’s when deciding the terms and rates of your loan, and different lenders weight them differently. To increase your chances of qualifying for a loan, work on all five by paying your bills on time, keeping your business’ cashflow healthy, and having a well-researched business plan.