The 5 C’s of Credit

Often when starting or expanding a business we look to borrow funds to accomplish ourBusiness Consultations business goals. When approaching a lender it is beneficial to understand the criteria that a lender uses to determine the “risk” and “suitability” of lending to a particular individual or business entity.

One thing to consider when looking for funding is that you are essentially entering a sales process, just like any other negotiation. The lender is the seller and the person seeking financing is the customer. This is often overlooked or reversed as individuals/businesses seeking financing see themselves in the subordinate position which is not always the case.

Before seeking financing it is important that you understand the 5 C’s of credit and how they can impact the decision-making process as well as the outcome.

The real question that you need to answer is – “How strong of an applicant am I?”

The 5 C’s of Credit


  • Presentation – how you are perceived – this can be judged on appearance and how well you have prepared for the meeting.
  • Credit rating – from Equifax or Transunion. Having strong credit repayment history and low credit utilization is a good thing whereas a credit score with weak repayment frequency and high credit utilization can create a weak credit report.

If you don’t know your credit score you can access the credit reporting agencies to find out what your credit rating is before seeking financing.


Capacity is one of the most significant factors when securing a loan. Do you have the capacity to pay back the loan in the eyes of the lender? The calculation is an individual’s total debt service ratio, which cannot exceed 40% of income monthly. Your forecasted cash flow may indicate income but is not a guarantee of income.


Another critical factor when looking for financing is collateral. The lender may want something tangible that they can “register” if they are going to lend out the money. In some cases the “better” the collateral the better the interest rate. The best collateral is tangible items that are registered and have a serial number or identifier, excluding RRSPs.  Items like rare art and unusual homes have a lower collateral score as they would be more difficult to value or sell. As general rule, you can look to borrow up to 60% of the value of an asset although this varies greatly depending on the asset.

The closer to cash (liquid) the collateral is the higher the percentage that can be borrowed against it. For a bond it could be 100% and typically for land it is around 75%.


This is a calculation of an individual’s net worth. Capital includes things that you have in your possession that could be used to pay back the loan which are normally not used as collateral such as jewelry, valuable art work, etc.

You will not be able to use these items as collateral but they can be included as part of your personal net worth.


This is a “common sense” or objective look at the loan purpose and business and whether the loan makes any sense or not to the lender. This is where a past relationship with the lender may provide more influence on the outcome. While conditions can play a role in securing financing, it is most likely the least significant of the Five C’s.

Before seeking financing for any endeavor, it would be advisable to consider these 5 factors of credit. Knowing how strong of an applicant you are will be beneficial in presenting a strong case for successful negotiation of a loan instrument.

The Halton Region Small Business Centre is here to help you. One of the goals of the Centre is to empower small and medium-sized enterprises and give you the tools to achieve success.  For more information about resources, services, business events and seminars, contact us by dialing 311, 1-866-442-5866, online at, by email at or visit us at 1151 Bronte Road, Oakville. You can also follow us on Twitter.

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