The five C’s of credit are important for bank lending because they provide a framework for evaluating the creditworthiness of borrowers. The five C’s of credit are character, capacity, capital, collateral, and conditions. We translate the 5 C’s specifically for SBA lending below.
Character
This is the lender’s assessment of the borrower’s trustworthiness and willingness to repay the loan. Lenders look at factors such as the borrower’s credit history (credit score of at least 680), employment history (direct or relatable industry experience), and debt-to-income ratio.
Capacity
This is the lender’s assessment of the borrower’s ability to repay the loan. Lenders look at factors such as the borrower’s income, assets, and expenses.
Capital
This is the amount of money that the borrower has available to contribute to the SBA loan. For an SBA business acquisition loan, the SBA requires the borrower put in 10% of the required capital for the project. Many SBA lenders will require a higher percentage – typically 15% or even higher if the borrower does not have strong industry or relatable experience.
Collateral
This is an asset that the borrower pledges to the lender in case the borrower defaults on the loan. SBA lenders will require borrowers to pledge all business and personal assets as collateral but note that unlike traditional commercial loans (aka asset-backed loans or ABL), the borrower does not have to fully-collateralize the loan. For example, a borrower with only $250,000 in collateral seeking a $1,000,000 loan may be approved, but the borrower will have to put up the $250,000 in assets as collateral. With a traditional ABL loan, a borrower are typically declined since the collateral is not 100% of the loan amount.
Conditions
This refers to the overall economic climate and the borrower’s industry. Lenders may be more or less willing to lend depending on the current economic conditions and the risk associated with the borrower’s industry. In the context of specific SBA lenders, all lenders have preferences – typically geography and industry. At SbaLenders.com, we help you navigate the SBA lending marketplace by connecting you to banks who lend to borrowers in your area and your industry. Simply provide us some basic information about your business or project, and our lender match tool will go to work to find your ideal SBA lenders.
By considering all five C’s, lenders can better assess the risk of lending money to a borrower. This helps lenders to make sound lending decisions and to protect their investments.