Why Character Matters in Lending and Financing Decisions: Understanding the 5 C's of Credit

Have you ever wondered how lenders make lending and financing decisions?

In five simple words: Character, Capacity, Capital, Collateral and Conditions. Nick-named "the 5 C's of Credit", these five factors form the industry standard for how most lenders make their lending and financing decisions. However, it's important to remember that these are not strict guidelines. 

Different lenders value certain factors more than others. For example, at Essex, "character" is the factor that matters most to us because helping hard-working businesses succeed is why we got into the lending and financing business in the first place. Regardless of your business or industry, understanding the 5 C's of credit is important for getting the best lending and financing terms for your business.

Let's take you through the 5 C's so you can better understand your lending and financing options and, more importantly, the types of lenders you want to work with.

Character

In lending and financing terms, your character comes down to your credit history as well as other personality factors like being hard-working and trustworthy. 

Yes, character includes your record of repaying loans and your credit score; however, with a relationship-focused lender, you'll also have the opportunity to share your business successes and your long-term vision.

Being on a first-name basis with your lender and ensuring they have taken the time to understand your business's opportunities is an essential aspect of demonstrating your character.

Capacity

Capacity refers to your ability to repay a loan. This is tied to your cash flow and your debt-to-income ratio. 

Existing debt obligations can also be an important factor that impact cash flow. Working with a lender who provides flexible debt consolidation or asset-based lending solutions may better position your business's capacity and help you unlock more favourable lending terms.

Capital

This refers to the amount of capital you have invested in your business. 

Business owners with some level of personal investment in their business demonstrate a commitment to their success, which is viewed favourably by a potential lender. That's why it's important to keep a clear record of your investments in your business.

Collateral

These are the assets you will use to secure the loan. Collateral is typically the equipment being financed, but can also include real estate, inventory and receivables. 

Working with a flexible lender who designs custom terms can be a smart way to structure lending and financing agreements that best reflect and protect your available collateral.

Conditions

This refers to the internal and external factors impacting your business, such as whether you're in growth mode, the purpose of the loan, the current state of the economy, industry trends or other factors that may affect your business. 

Some conditions, like the state of the economy, are not in your control, but you do have choice when it comes to who you partner with. 

In times of economic stress, big banks tend to get rigid and protective with their lending terms. Working with alternative lenders offering more flexibility is often important for getting the best lending and financing terms. 

Also, when you have a personal relationship with your lending partner, you'll be better positioned to explain how you will use the loan, and that helps a lender understand the opportunities that the loan can unlock.

Essex Lease Financial is a lending partner that gets to know businesses on a personal level. When it comes to the 5 C's of credit, our biggest emphasis is always on your character.

Whether you're looking to unlock working capital, finance new equipment, or restructure existing debt, we're a lending partner committed to your success.

Reach out to us today to learn more or get started.