What Are the 5 C's of Small Business Lending and Startup Investing?

There are key “Pillars” Banks, Private Lenders and Investors look for when it comes to small business loans. It’s widely referred to within the banking industry as the “Five C’s” of Lending and/or Investing:

The Five C's of Lending and Investing


The most nebulous of the Five C’s. Some Lenders do take in consideration your management team’s experience and history as well as your reputation in the community. Most banks, however, rely more heavily on the rest of the “Five C’s.” Many Venture Capitalists and Investors, interestingly, will look at this C as the one of the most important –if not the most important “C”.

Credit Score:

This Pillar is one of the most important for Banks. Traditional Lenders swear by this number. Banks will often say it’s a measure of your commitment to meet your financial obligations. Alternative Lenders are a lot more flexible, but many will, at least, want to understand why your score is where it is. Low Credit Scores will be scrutinized by Banks. Credit is generally a nonissue for potential Investors, but they’ll need a good understanding of why your score is where it is.


The most important Pillar. No Lender wants to loan you money –if you can’t adequately prove you can repay it. The easiest way to prove this is have three years of historical financials backing up what you’re stating financially. If you don’t have three years of financials, then you must show a fundamental “pivot” point or “turnaround” scenario by supplying additional contracts with target customers. These agreements need to be executed, or in the process of being secured. Otherwise, it’s just a good story… And, while a good story makes for fascinating conversations with potential Lenders –they rarely survive the due diligence and underwriting phases if that story isn’t supported by appropriate agreements.


The “supporting actor” Pillar. It’s not the most important factor, but it can be a deciding factor. Capital refers to how much “skin-in-the-game” you’re coming to the closing table with. Ex: If you’re purchasing a business and you’re prepared to put 30% of the purchase price as a down payment, then the Bank will believe you are less likely to walk away from the deal. If you don’t have access to cash reserves, consider doing a responsible joint venture with a partner who will lend the cash portion of the deal.


Another “supporting actor” Pillar. Many Lenders are “cash flow” Lender –so they focus intensely on your ability to repay any business loan. Some Lenders are “collateral” or “asset-based” Lenders. Accordingly they focus on what assets or collateral is provided –in the event of catastrophic failure. In other words, if you stop paying: what will they own? And, what is it worth to them? Additionally, keep in mind that Lenders and Investors will significantly discount the Fair Market Value of your collateral depending on the type of deal your seeking. Again, consider seeking a reliable partner to supplement your transaction with a Lender.


Lenders and Investors rely on the Five C’s to make decisions on whether to loan you money –or not. It’s common to have one or two “C’s” that are weaker than the other Pillars. So long as the remaining “C’s” are strong enough to overcome any issues presented by the weaker ones, you should be in good shape. Think of it this way, if you enough Pillars (legs) for you to make a “sturdy table,” Lenders should be interested.

Suggested Action:

Spend time every quarter (or at the very least, every year) stress-testing your company’s Five ‘C’s. Doing so on a regular basis, will make your company more valuable –regardless if you ever seek out Investors. Paradoxically, the best time to apply for a loan or investment is when you don’t need it. And, when you make your moves accordingly, you can make the system work for you –instead of against you.

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