Businesses channel the creative, entrepreneurial spirit of energetic people into vital products and services, while creating valuable jobs for every nation. During challenging times, it is important for these business owners to understand all facets of credit.

These are the five “C’s” of credit that will determine whether a business receives a commercial loan:

  • Character
  • Capacity
  • Capital
  • Conditions
  • Collateral

The “Character” of a business is the moral integrity of the owner and employees. This could include the reputation of the firm in the community. What is the quality level of products and/or services that are delivered by the company? Companies with strong character receive lower interest rates on their commercial loans.

A company must demonstrate an acceptable “cash flow” or “revenue stream” that will be used to repay the commercial loan. The amount of this cash flow is the “Capacity” of the business to fulfill its debt obligations.

Banks and lending institutions will audit the financial assets (cash, equipment, and property) of the business seeking the commercial loan in order to determine the “Capital” or net worth of the business. Whether or not the commercial loan is used for investment that increases the capital of the business is also a factor in measuring business capital.

“Conditions” refers to both the details (or terms) written into the financial contract, the specific market for the company’s products or services, and the state of the overall economy. The details of the contract - interest rate, repayment schedule, and default penalties - will dictate when a commercial debt collector will be contacted.

For a “secured” commercial loan, the “Collateral” consists of the equipment, machinery, and property that will be surrendered if debt obligations are not fulfilled.

A company that wants a commercial loan must satisfy all five of these criteria in order to be deemed “worthy” of valuable capital. Once companies properly understand all of the facets of credit, they will be more capable of preventing commercial debt collection due to loan default.