5C’s of credit are the backbone behind all lending done by most financial institutions. If you want a detail breakdown, Investopedia goes into depth about the 5C’s.

Character

Character looks after the question of “Will they Pay?” As it investigates your background, capabilities and history, as well as your organization and beyond. This is also where your Credit score and credit checks take place. A Bank will look at your history with debt for both your business and personal.

While an important part, if there was a rough patch in your history, sometimes the banks are willing to look past it, depending on the severity, and if there is a clear change and reasonable explanation.

One thing to note, is that if you are in a position where you owe funds to the government, personally or commercially, the Bank will most likely not willing to provide funds, until an agreement or that debt is settled.

Capital

Capital looks at your assets and the full amount of capital that you have in your business, as this will allow the bank to understand the health of your financial condition. They will see how much you may be leveraged, or as mentioned how much of the business is financed by debt or by investors.

Capacity

This section determined your capability to maintain and take on more debt financing. This is determined by a ratio known as the Debt Servicing Ratio which we will explore more in the ratio section. However, it basically asks how much operating income is there to cover the current obligations.

Collateral

Collateral is what you can put up in the event you are not able to pay. At a minimum it is typically an unlimited personal guarantee. Meaning that in the event of unable to pay, which would lead to a bankruptcy, you personally are responsible to pay back the loan.

Then there is what is called a General Security Agreement, in which a broad collateral is secured against all assets owned by the business.

Lastly, there is real estate secured, in which you stake a property against the loan. This typically allows you to have the lowest form of interest rate.

Conditions

The last C is what is called conditions, in which the bank will apply specific measures that you will have to follow and stay within to be able to maintain the loan. These measures may be that you need to maintain certain ratios, such as a maximum that you can hold on to accounts receivables and payables, or even the specific use of the asset at hand.