Applying for a small business loan? Consider the 5 Cs of credit.

If you’re in business, you know that opportunities for growth can come quickly. Whether it’s a new product line or a chance to move to a better facility, your ability to secure the right kind of financing can often be the key to making the move or not.

Many lenders base their decisions on “the 5 Cs of credit,” conditions that help them judge whether you’re a good risk. Knowing what these involve—and being ready to answer these questions quickly—can put you in the best position to make the most of a promising opportunity.

1. Character

When it comes to loans, your credit score reflects your character. Lenders will also keep an eye out for your payment history including lines of credit, credit card use and how you pay your vendors. They’ll also review how long you’ve had your business account and your overall relationship with your bank.

How to prepare

• Sign up for a credit monitoring site like Credit Karma to make sure your don’t have any payment issues.
• If you have anything sitting in collections, take care of it ASAP; for past collections issues, have a letter of explanation as to how you resolved it.   
• Work with your banker or relationship manager to set up a lending plan for your future business strategy.
• Set up a credit card or a small loan. A history of timely payments—of any size—helps build your credit character.

2. Capacity

Capacity measures the borrower's ability to repay a loan. The lender will compare your income against your recurring debts, assessing your debt-to-income ratio. They’ll look at tax returns, your business account activity, net income over the years and cash flow, as well as calculate your debt service coverage.

How to prepare

• Work closely with your accountant to make sure you’re getting the most out of your business credits.  
• Meet with your banker to set up accounts and services that help you save money, such as direct deposit, auto-pay or merchant services.
• Spend within your means, especially when it comes to credit.    
• Explore “the waterfall effect”—pay off small debts first to keep monthly payments manageable.
• Don’t be afraid to raise prices if your costs for goods begin to rise noticeably.

3. Capital

Lenders also consider the capital that you can put toward a potential investment. As they see it, the more you can put into it, the less risk that you’ll default on a loan. They’ll consider all account balances with potential liquid capital, including savings, investments, home equity and checking, to determine how much you should put into a down payment.

How to prepare

• Set up both a personal and business savings account if you haven’t already. It’s a good place to deposit your extra funds.
• Keep your latest personal and business financial statements readily available and review them as you receive them, either monthly or quarterly.

4. Collateral

Collateral can help a borrower secure loans. If you default on the loan, the lender can get something back by repossessing it. Equipment, commercial real estate, vehicles, and accounts receivable can be used as collateral.

How to prepare

• Keep an up-to-date balance sheet that accurately lists your business assets.
• Contact your financial institution about Small Business Administration (SBA) options and whether they’re an SBA Preferred Lender. You can also get free small business tips, online training and more when you sign up for SBA eNewsletters.

5. Conditions

Timing and circumstances can also affect your loan application. You should be ready to clearly present to the lender why you need the loan, what industry you’re in, your business experience and current economic demand.

How to prepare

• Keep your online resume current. Include any business-related classes, certifications or seminars you’ve attended.
• Your business plan should tell your story, what you do and why, and where you plan to see your business within the next five years.
• Make sure your business website is accurate and easy for lenders to find. Include positive client reviews—they can reinforce your position as a solid company.
• Stay informed about the state of the industry; follow relevant articles, publications and online groups.
• Be ready to address any obstacles you see—and what you’re doing to overcome them.

Get ready to grow.

Managing and understanding credit and lending is an important part of businesses of all sizes. By familiarizing yourself with the questions lenders will ask—and having ready answers—you can more easily do what it takes to bring your ambitions to reality.