The 5 C's of Credit:
Banks and commercial finance companies are in business to make money and when it lends money it wants to be sure that it will be paid back.
Banks must consider the 5 "C's" of Credit each time they make a loan.
Capacity to repay is always the most critical. The lender will want to know exactly how you intend to repay the loan you took out to open your retail store and there are several facts that are considered.
The cash flow from the retail business, the timing of the repayment, and the probability of successful repayment of the loan are all considered. Also the payment history on existing credit relationships - personal and commercial - is considered since it’s an indicator of future payment performance. You should also be able to provide your lenders your contingent sources of repayment.
Capital represents the money you personally invested in the business. This indicates how much you will lose if your retail business will fail. Lenders will want to see you contributing with your own assets and to undertake personal financial risk to establish the retail business. A significant personal investment in your retail business makes you more likely to do everything in your power to make the business successful.
Collateral or guarantees are the additional forms of security you can provide the lender. Equipment, buildings, accounts receivable, and in some cases, inventory, are considered by the bank possible sources of repayment if they are sold for cash. Both your retail businesses’ and your personal assets can be sources of collateral for a loan. A guarantee means that someone else signs a guarantee document promising to repay the loan if you are not able to.
Conditions focus on the intended purpose of the loan. How will the money be used? Will it be used for additional equipment, working capital, or inventory? Another thing that will be considered by the lender is the local economic climate and conditions both within your industry and also in other industries that could affect your business.
Character is simply the personal impression you will make on your potential lender or investor. This is the subjective part of a loan. Educational background and experience in retail business will be reviewed. Other things that will be considered are the quality of your references and the background and experience of your employees.
See also Loan Application.