The 5 Cs to consider when applying for a business loan

The opinions expressed by entrepreneurs contributors are their own.

For some entrepreneurs, starting your business is not an option. This is where the search for an alternative method of obtaining capital comes in. Business credit is the best-known option for an entrepreneur to receive an influx of capital.

Business credit is the ability of a business to borrow to buy something now and pay the money back later. When a business is applying for credit, there are five things (the five Cs) that a lender will consider before approving the business for a loan. Here they are below:

1. Character

The character refers to your company's credit history. Depending on your business history, your personal credit history may also come into play. previous credit history (eg lines of credit, auto), the borrower is likely to be approved for the loan. If the character of the borrower displays an immature credit profile (eg no previous credit loans, arrears, collections), the lender is likely to reject the borrower.

Similar to personal credit, there are ways to check your business credit profile, such as Nav.com and DNB.com (Dun and Bradstreet). Business credit profiles are not as mature as personal credit, so you may see discrepancies in your different report source profiles.

Related: 5 Tips for Getting the Business Credit You Need to Start and Grow Your Business

2. Capacity

The capacity of a business is its ability to repay a loan. A lender will look at your debt-to-income ratio (DTI) to calculate capacity. The formula to calculate your debt to income ratio is (total debt to total income) x 100.

The lower your DTI, the better your ability to repay a loan in the eyes of a lender. As with personal credit, you want to keep your business DTI at 36% or lower to be considered for future loan opportunities.

3. Capital

Equity is the asset of your business that the borrower can use to repay a loan. Only liquid assets - such as funds in bank accounts, investments and assets that the lender can claim - are taken into account. Accounts receivable are not capital in this case, as they are not tangible.

Related: How to Qualify for a Business Startup Loan

4. Warranty

Collateral is an asset that can be offered as collateral to reduce the risk of capital loss to the lender. Examples of collateral could be property, cash, inventory, accounts receivable, or equipment.

Typically, lenders lend 80% of the value of the collateral. This means that the borrower should have 20% of the purchase amount or some other way to raise the capital. This is called the loan-to-value ratio.

5. Terms

Conditions include how the company plans to use the money and external factors, such as the state of the . For example, an equipment loan may be less risky for a dropshipping business than a working capital loan in a risky business environment, such as a loan company.

When applying for credit, some of the five Cs are more within the company's control than others. Let's discuss how to increase your chances of being approved for credit by improving character, capacity, capital, guarantees, and terms.

Related: These Things Can Give You Success in Borrowing Business Loans

How to Increase Your Chances of Being Approved for Credit

Enhance Character: Character must definitely be maintained. Some ways to improve your character score include paying bills reported to credit bureaus early or on time (e.g. credit cards and lines of credit), higher credit age, diversifying your portfolio credit with a combination of revolving credit and installment credit and getting adverse events (l...