What is 5 C’s of Small Business Lending?

Commonly referred to as the 5 C’s, here is what a lender will want to know about a business owner and their business:

Character – If you want a loan for your business, the lender may consider your experience and industry track record in your business and industry to evaluate how trustworthy you are to repay. When the going gets tough, will you help the lender get their monies back? Are you a help or a drain on your business? Lenders need to know the borrower and guarantors are honest and have integrity.

Credit Score – This is perhaps the most important aspect a banker will look at when considering a loan approval. As history is the best predictor of the future, a lender will examine the personal credit of all borrowers and guarantors involved in the loan. A factoring company puts less emphasis on the Credit Score of the business owner and looks more into the Credit Score of the business’ customers (the Account Debtors).

Capacity – Lenders are going to look at your monthly and annual revenue and base this amount on the company’s ability to pay back the loan. A Factor will look at your gross margins and make sure you have a profitable business after the cost of factoring and credit protection. However, at eCapital we are very start-up friendly!

Capital – Bankers are risk-averse and need to make sure the business has a means of paying back the loan in the case the capacity or revenue is lower than expected. Factoring companies often work with start-ups and companies with less capital on hand. They can do this based on the credit risk shifting from the business owner to business owner’s clients. An Invoice Factoring Company can turn your solid A/R into “Capital”.

Collateral – Banks and traditional lenders consider assets like real estate or capital equipment as collateral. Banks will also look at accounts receivable or monthly credit card receipts as collateral as well, but an Invoice Factor or MCA Lender will typically assign a higher value.

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