Have you ever applied for a business loan with your bank and walked away wondering what criteria the bank uses to decide whether or not to approve your loan?

Every bank is different and there will be differences in loan policies and procedures. Sometimes, there will even be differences in the final decision, too. However, there are lending principles that are universal among banks.
The 5 C's of Credit

When I began my banking career 30 years ago, one of the first principles introduced to me was the “5 C’s of Credit.” This phrase is an acronym that covers the important things (all beginning with a “c”) to consider when reviewing a loan application.

Understanding these five c’s will put you in a better position to successfully approach your bank.


Character is the most important and therefore the first consideration in making a loan decision. It is also the most difficult, as it is subjective. Determining one’s character is to determine the borrower’s willingness to repay the loan.

A credit bureau report reflecting your past payment history is often used to establish character. Your employment history and personal financial strength are also helpful tools. It’s important to know your banker and let them get to know you. This personal relationship provides a better opportunity for your banker to feel comfortable lending money to you.


Capital is a measure of the borrower’s investment in the business. This helps to determine the borrower’s ability to overcome financial difficulties. Capital is measured in cash liquidity, equity in fixed assets or retained earnings. Bankers are generally more favorable to requests where the owner has some skin in the game.


Capacity is the financial ability of the borrower to repay the loan. The best measure of a borrower’s capacity is understanding the company’s income and expenses and thus their net cash flow to service the debt.


Conditions refer to the overall economic factors that pertain either to your particular business or the economy as a whole. For example, conditions during the 2008 recession had an impact on banks’ loan decisions. Other factors could be competition in your particular field. Conditions are subjective in nature, so a good understanding of your business and its place in the marketplace is required.


Collateral is often the first thing that comes to a borrower’s mind. However, it is the last on the list of the 5 C’s for a reason. Bankers don’t want to own your collateral. Before even considering the collateral, it is important to make sure the previous 4 c’s are met.

Collateral is used as a safety net to ensure the bank is repaid in the event the borrower cannot pay the loan.

If you think about it, it’s common sense. Is the borrower willing and able to repay the debt, does he or she have sufficient equity in their business to support the debt, do they have a cushion in the event hard times come, are the economic conditions favorable and is the collateral sufficient to repay the loan?

Regardless of whether or not your banker uses the 5 c’s, if you consider them while preparing your loan request, you will be ahead of the game…and your banker will appreciate it.

About the Author:

David Smith is the president of Central National Bank, where he serves as chief lending officer. When he isn’t working, he enjoys spending time with his wife and three children, volunteering, and following Texas A&M football.

By |2020-08-24T22:11:57-05:00August 28th, 2014|0 Comments

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