Remember the song from Sesame Street that Cookie Monster sings? Now what starts with the letter C? Cookie starts with C. Let’s think of other things that start with C.

As a small business owner, you should care about some other things that start with C. Commercial lenders in the banking industry “sing” the 5 Cs of Lending. Knowing the words to their song can open access to capital for businesses and make finding financing a whole lot easier. 

Bank lenders assess a business’s bankability on the 5 Cs—a quick shorthand to determine the risk of lending to a person or business.

  1. Credit Score
    First, and maybe most important, is the credit score. A score of 680 or better is usually the cut off, but some banks can be more flexible. Don’t have a 680? Credit counseling can be helpful in preparing to approach a bank and getting an early start on addressing a sagging score.

  2. Cash

    Second, the banker will assess how much cash the business owner will invest. The banker wants the owner to be invested financially in the business, and bringing along 5% to 15% of the needed funds to start the business will hit the right note with the bank. 

  3. Collateral 
    Third, the banker will assess the collateral, meaning the asset(s) pledged by the borrower that will back the loan should there be a default. Depending on the loan, assets could be a building, equipment, inventory, or personal assets. The banker must protect their loan, and having sufficient collateral will check off that box and reduce the risk to the bank. 

  4. Character
    Fourth, the banker will look to see if the borrower has the right character or skills and attributes to be successful. For example, if the business owner has never cooked for a group and they want to open a restaurant and be the head chef, the banker may likely conclude the lack of skills would increase the risk and then the lender would deny the loan. Lenders are asking themselves, “Is this the right person for this venture?”

  5.  Climate (or Cash Flow)
    Fifth and finally, the banker will consider if the proposed business is right for today’s business climate. Banks want to assess if the new business owner would bring a needed service or product to the market. They will want the business owner to demonstrate that there is a market for the product or service and that there are enough potential customers to support the business. In other words, will the business have sufficient cash flow to support the repayment of the loan.

 

Knowing that the banker’s job is to assess the inherent risk of a loan and measure the ability of the borrower to pay it back will help the borrower find the perfect pitch with a banker. Hitting all the “C” notes is the key to unlocking access to capital for a small business.

Need help putting together this song to sing to the bank? The NH Small Business Development Center can help you compose your plan with no-cost business advising and provide resources to make the plan stronger.

Andrea O’Brien serves as a business advisor for the southern region of the state with the NH Small Business Development Center. O’Brien is also the director of the statewide Business Sustainability Program.  She can be reached at andrea.obrien@unh.edu. For more information, visit nhsbdc.org.

 

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