Meeting with a financial institution to determine if you are qualified for a loan can be intimidating and confusing. You might be feeling unprepared or worried that you may have overlooked key criteria of the loan-granting process. Fortunately, many traditional lenders use a framework of five main characteristics, or C’s, to evaluate potential borrowers for both personal and business lending needs.

Let’s take a look at the five C’s many lenders consider when reviewing loan eligibility and steps you can take to optimize your chances of obtaining a loan.

  1. Character

Lenders evaluate your creditworthiness based on how likely you are to repay a loan. The main way of assessing your ability to make on-time payments is by reviewing your credit report. Lenders often look at the past seven to 10 years of your credit report to glean insight into your credit history, as well as your FICO credit score.

Lender considerations:

  • Proven employment and personal experience fulfilling commitments and demonstrating responsibility
  • Sufficient financial reputation and interaction with lenders
  • Adequate references that can vouch for and confirm your creditworthiness
  • Sound personal and business reports from the three main credit bureaus: TransUnion, Equifax and Experian

What You Can Do

Before applying for a loan, review your credit report for accuracy. If there are any outstanding issues or discrepancies, identify and report them to the credit bureaus before a lender views your report. You will also want a good FICO score to have the best chance at receiving a loan. One way to do this is to pay all of your bills on time. Consider setting up automatic payments to avoid late penalties, which may help boost your score.

Lenders take all criteria into account when reviewing your loan application, and their personal experience with you may outweigh other factors. Be prepared to demonstrate your responsibility and build a positive relationship with the lender.

  1. Capacity

Your ability to repay your debt is a primary factor in the loan-approval process. Lenders must be certain you have the means to repay your loan. A lender will also want to ensure you are not overextended by calculating your debt-to-income ratio. The lower the ratio, the better chance you have of obtaining a loan.

Lender considerations:

  • The estimated loan repayment period
  • Probability of repayment based on employment duration at your current job and your income stability
  • Your debt-to-income ratio
  • Payment history
  • Current cash flow compared to the past few years

What You Can Do

Calculate your debt-to-income ratio before a lender does by dividing your total monthly debt by your gross monthly income1. Financial institutions typically view candidates with a ratio of 36% or less as less risky1. You may also pare down debt through debt consolidation and refinancing options to improve your creditworthiness. Check out our debt consolidation and refinancing options.*

Additionally, prove your reliability and income stability by applying for a loan after you have worked for an employer for a set time. The longer your employment status, the better your chances are to obtain a loan.

  1. Capital

Lenders may want to see an investment from you when applying for a loan. This is meant to show lenders you are committed to your venture and the credit you are applying for. For example, it is customary for individuals to present a down payment when applying for a mortgage loan. In the case of a business loan, they way want to see you have invested personally in your company. Lenders want to be assured that you have enough equity to repay these loans and intend to remain with your business long-term.

Lender considerations:

  • How personally invested you are in the credit or business
  • Your debt-to-equity ratio
  • How much equity you have invested in the loan

What You Can Do

An estimated 60% of small businesses are started from personal savings2. Save up as much as you can for proof of capital before applying for a business loan. Lenders may want to see you have a nest egg, savings account or emergency fund available that you can utilize to repay the loan if an unexpected event occurs, such as losing your job.

If you do not have savings available, a lender may still grant you the loan if you meet other criteria. However, optimum loan rates and terms to may require acceptable capital.

  1. Collateral

Assets and collateral are used as a backup source of payment to your financial institution if a borrower is unable to repay the loan. For example, if you purchase a car with an auto loan and are unable to repay the loan, your financial institution may need to repossess the car.

Lender considerations:

  • Various asset types to use as collateral for your loan, which may include real estate, financial accounts, equipment and more
  • How much each asset is worth based on historical liquidation values
  • A guarantee document may be considered as a secondary form of collateral. This represents an agreement to further support the loan if necessary.

What You Can Do

Survey your possessions, determine if you owe payments on any of them and determine the total value that can be used as collateral. If you do not have collateral, you may want to consider asking someone with assets and in good financial standing to co-sign your loan. This may, however, add to your venture's risk factor, as you now have another person’s livelihood on your shoulders.

  1. Condition

The purpose of the loan, as well as current industrial and economic conditions, is of paramount interest to business lenders, as they may impact your ability to repay your debt. What is trending in your industry? Is the economy growing or faltering? These are questions lenders and borrowers need to think about to effectively identify risk and ensure the loan will be repaid.

Lender considerations:

  • Level of risk and ability to withstand the current market
  • Economic and industry conditions and trends
  • Loan coverage
  • Borrower relationships with others in the industry

What You Can Do

While this component is not under your control, you can leverage conditions and trends to access better loan terms. For example, when the industry you are looking to enter is expanding, lenders may be more favorable.

Bonus C: Communication

Getting a personal or business loan is all about building relationships with your financial institution and lender. If they know your character, stability and responsibility, they may be more likely to lend to you. The main way of building a strong financial partnership with your lender is by openly communicating with them about your goals, opportunities and obstacles in your venture.

Visit our website to learn how we can help you reach your personal and professional goals.

*All loans subject to credit approval.

1https://www.bankrate.com/calculators/mortgages/ratio-debt-calculator.aspx

2https://www.nerdwallet.com/article/small-business/master-the-5-cs-of-credit