The thing is, not all loan applications merit guaranteed approval. Your financial standing and credit score, among others, can easily influence how lenders assess your loan request. This is why becoming prepared is essential. Read on to discover key requirements and tips to help get your personal or business loan get approved.
What are the 5 Cs of Credit?
In credit analysis, the “5 Cs” refer to five factors that identify a creditworthy borrower. Ratings help financial institutions decide whether applicants are eligible for credit and set interest rates and credit limits for existing borrowers.
Character
In evaluating creditworthiness, character is the most significant factor. A person’s track record of managing credit and making payments indicates their “character,” i.e., their propensity to repay a loan on time. Defaults in the past indicate negligence or irresponsibility, which are both undesirable characteristics.
Capacity
The borrower’s ability to repay the loan is crucial to determining the lender’s risk exposure. The amount of income, employment history, and current job stability determine the ability to repay outstanding loans. Small business owners with unsteady cash flows are likely to be classified as “low capacity” borrowers. The lender also considers other responsibilities in evaluating future payment obligations, such as children preparing for college or terminally ill relatives.
Collateral
Typically, borrowers are required to pledge certain assets as collateral when being assessed for a secured loan, such as a car loan or a home loan. This includes financial assets and securities such as bonds or fixed assets such as title to a parcel of land.
Having collateral increases your lender’s trust that you will likely repay the loan and get your loan approved faster.
Capital
A borrower’s capital is the total value of assets under his name. In other words, it represents how one invests, saves, and has assets such as land, jewelry, and others. The primary repayment method for loans is household income; capital serves as a backup in case of unforeseen circumstances or setbacks, such as unemployment.
Conditions
Lenders want to be sure that there’s a sustainable market for your business. Make sure that your business plan can answer how you will be successful based on your industry, competition, and economic condition. You can also include your business history and how you were able to surpass difficult circumstances.
Ready to Get Your Business Loan Approved?
Keeping the 5C’s of credit in your list when applying for a loan makes the approval easier and faster. Assess yourself based on the list and you will know your readiness.
