Credit application with Approved stamp. Concept: 5 C's of credit.
Timothy R
By: timothy-ronaldson
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What are the 5 C’s of Credit?

As a small business owner, you know how important it is to put yourself in the best position to receive funding from financial institutions, but did you know that the best way to do so is by mastering the 5 C’s of credit?

Understanding what these 5 C’s of credit are, how they work, and why they’re important can put you in the best position possible to receive funding for your business when you need it.

What are the 5 C’s of credit?

Very simply put, the 5 C’s of credit is a concept or a framework that a large number of traditional lenders will use as part of their evaluation of small business borrowers. Each of the 5 C’s actually stands for a characteristic of a person’s creditworthiness: character, capacity, capital, conditions, and collateral.

While there isn’t a hard-and-fast rule when it comes to exactly what you need in each of these characteristics—since different lenders require different things—following the basics of the 5 C’s of credit will help put you in the best position possible when you’re looking to obtain funding for your business.

The 5 C’s of Credit, Explained

5 C's of credit, infographic, camino financial

Here is a quick breakdown of what the 5 C’s of credit are, why each one is important to lenders, and how to conquer each C.

1. Character

In terms of the 5 C’s of credit, Character is how a lender will view you from a personality, credibility, and trustworthiness standpoint. This is more of a determination of your character as an individual, and less about certain aspects of your business.

Your personal character is important because financial institutions want to work with trustworthy clients that will keep their word and, ultimately, will pay back their loans on time. Financial institutions assess your character through things such as your credit history, references, and any reputation/interaction you’ve had with other lenders.

How to master Character

The best way to master the C of character is to establish a relationship with your local community bank or financial institution that you hope to do business with. Meet the local banker who’s in charge of business banking and see if you can establish a working relationship that benefits both you and them.

2. Capacity

Capacity represents your general ability to repay a loan. It’s no secret as to why this would be important to financial institutions that are lending you money. They only make money if you keep up your end of the bargain and pay back the loan you took.

Financial institutions will assess your capacity based almost entirely on your financial history. This includes your history for borrowing and repaying loans you’ve taken in the past, your credit score and other metrics such as your debt-to-liquidity ratio and cash flow statements from your business. Sometimes, financial institutions will also take a look at your business’ revenue.

How to master Capacity

One of the best ways to master this C is to pay down your debt as much as possible before applying for a new loan. This will improve almost all aspects of your capacity, including your cash flow, credit score, and borrowing history.

3. Capital

Capital in terms of the 5 C’s of credit is the amount of money that you have invested in your business. Financial institutions often like to see that business owners have “skin in the game, ” as they say. What this means is they like to see people who have invested a good chunk of their own money into their business venture, and didn’t just borrow the money to get it started.


This shows how serious you are about your business’ future.

A financial institution will use your business’ financial reports to assess your capital. They’ll be able to see how much money you invested into the business originally and whether you pumped any extra money into the business since then.

How to master Capital

An easy way to master this characteristic is to obviously invest at least some of your own money into the business. Beyond this, though, it’ll be important that you keep good records that show what your investments into the business were and what your working capital is.

4. Conditions

Conditions, in the realm of the 5 C’s of credit, refers to two things, actually.

First, we are talking about the condition of your business itself—whether your business is doing well or not, as well as what your intended use of the loan is or how much you intend to borrow.

Second, we’re talking about the general conditions around you—the state of your industry, the state of the overall economy, and how each of these may affect your business and your repayment ability.

Financial institutions ultimately want to lend money to people in good conditions. The better the conditions surrounding that person, the more likely he or she is to repay the loan per the terms. Financial institutions will make this assessment by reviewing the overall economy, how your business is doing compared to your general industry and/or competitors, and your relationships with both customers and suppliers.

How to master Conditions

Some of these conditions will be completely out of your control. For example, there’s little you can do to influence the state of the overall economy in the United States. However, you can control the conditions regarding your business. You should apply for a business loan when your business conditions are good — when your business is performing well and when you as an individual have good financial metrics.

5. Collateral

Collateral refers to any assets that you have that you will use to secure or guarantee the loan for which you are applying. Collateral will be used as a form of repayment on the loan if you can’t repay it the traditional way.

Financial institutions may consider a number of different types of collateral if they require it from you to take a loan. This could be business equipment or real estate that you own. It could be your working capital, which would include your inventory and accounts receivable. It could even be the home that you own.

How to master Collateral

To master this C, it’s important to choose a lender that doesn’t require collateral and whose interest rates to compensate the lack of guarantee are still reasonable. You want to protect your most valuable personal assets should the unfortunate time come when you have trouble repaying a loan.

The last thing you want to do is open yourself up to having your home or other properties seized because you fell on hard times with your business.

The 6th C of credit?

You might hear about people talking about the 6 C’s of credit:  character, capacity, capital, conditions, collateral, and credit score. As you probably noticed, this list has an extra element, the credit score.

While having a good credit score is vital, we don’t consider it as a different element of credit, it’s already part of Capacity.

How to Improve Your Credit Score

Camino: Your Favorite C

Camino Financial is a finance company that is focused on growing small businesses in the U.S. in a variety of different ways. We offer loans up to $400,000 and business solutions to maximize your long-term financial success.

We are different from other lenders in that we care about our customers and genuinely want to help them succeed. We separate ourselves from other lenders out there with how we approach the 5 C’s of credit.

  • Character: Our business loan specialists work directly with all of our clients to get to know who they are. By learning the ins and outs of your business we can find the financing solution that best fits your needs, and design a repayment plan that will maximize your investment without forcing your finances.
  • Capacity: We don’t require a minimum FICO score or credit history for business owners who are seeking a loan. We understand that many business owners haven’t had the time to build a solid credit history yet.
  • Capital: We don’t require a lot of capital to qualify for a loan since we know small business owners often have trouble accessing capital.
  • Conditions: We require a shorter history of operations and performance for small businesses than many other financial institutions. While most lenders require 2 years in operations, at Camino we only require 9 months.
  • Collateral: We don’t require any collateral for the small business loans we offer.

There are plenty of other ways that we at Camino Financial help our customers move forward in small business. If you need a loan for your small business, we’re your best option.

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