5 C's of Credit

Know What Lenders Look For

Improve your chances of getting a loan by learning what we look for. When you apply for a loan, we look at a number of factors. We review your credit/payment history, income, and overall financial situation including the criteria commonly termed the 5 C’s of Credit: Character, Capital, Capacity, Conditions and Collateral.


When applying for a business loan, we will consider your experience and track record in your business and industry to evaluate how trustworthy you are to repay. We also use your personal credit history as a measure of character, and a way to understand how reliable you have been in repaying past loans as a subjective measure of both the borrower’s willingness and ability to repay the loan.

Qualifying for credit hinges largely on your credit history — the track record you’ve established while managing credit and making payments over time. Your credit report is primarily a detailed list of your credit history, consisting of information provided by lenders that have extended credit to you. In addition to the credit report, we may also use a credit score that is a numeric value – usually between 300 and 850 – based on the information contained in your credit report. The credit score serves as an indicator for the lender about risk based on your credit history. Generally, the higher the score, the lower the risk.


Capital is a measure of the borrower’s investment in the business or project as represented on the loan application. This helps us determine your ability to overcome financial difficulties. Capital can take the form of initial cash infusion, retained earnings, or other assets of the business owner. Bankers tend to look more favorably on small businesses when the owner has made a personal investment. Capital refers to your net worth — the value of your assets minus your liabilities. In simple terms, how much you own (for example, car, real estate, cash, and investments) minus how much you owe.


We need to determine whether you can comfortably manage your payments. Capital is an evaluation of your financial capacity to repay the loan. Income amount, stability, and type of income may all be considered. The ratio of your current and any new debt as compared to your before-tax income, known as debt-to-income ratio (DTI), may be evaluated.We want to ensure your business will generate enough cash from daily operations to cover loan payments. The best way for MBT to determine capacity is by analyzing the historical cash flow generated by the business. 


This is a measure of the overall economic environment and an evaluation of the financial health of the borrower’s industry, their local market, and competition. Bankers need to understand how the economic environment affects the company’s ability to repay loans. Your discussions with us about your business’s competitive environment is an important part of this analysis. We will also consider the loan’s purpose and how you plan to use the money, such as whether the loan will be used to purchase a vehicle or other property. MBT may also compare your company’s performance with peers’ performances and will consider a number of outside circumstances that may affect your financial situation and ability to repay.


(When applying for secured loans)

Loans, lines of credit, or credit cards you apply for may be secured or unsecured. With a secured product, such as an equipment loan, you pledge something you own as collateral. The value of your collateral will be evaluated, and any existing debt secured by that collateral will be subtracted from the value. The remaining equity will play a factor in the lending decision. Remember that lenders are not interested in taking ownership of the items you pledge as collateral. However, your willingness to pledge personal assets as collateral reinforces your commitment to your business. MBT may require a guarantee in addition to collateral. A guarantee means that another person signs a document promising to repay the loan if you can’t.


By understanding the 5 C’s, you can do a little self-evaluation in order to better position yourself for a successful lending experience. 

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