How to Build Business Credit?

What are the Five Cs of Credit?

Anytime you seek to borrow money, the first question a lender will most likely ask is "What is your credit score?" Simply defined, your credit score is a barometer creditors and lenders use to determine your ability to pay bills in a timely fashion. For the purposes of borrowing money from a bank and/or associated lender, your credit rating informs the lender as to your capability to pay the loan principal and interest. The 5 Cs of credit are how overall creditworthiness is determined and a creditor or lender determines whether a loan or credit is extended. The 5 Cs of credit consists of:

Character

Are you in good standing in your community? Do you pay your bills on time and in the full amount? Do you have any history of not paying bills either in a timely fashion or not at all? Have you defaulted on any student or government loans? These are a few examples of the criteria used to assess your level of character. Any issues in this area may cause concern for a creditor or lender. 

Collateral

What assets do you own? Items like a house, property, or business are considered assets and can be used by a creditor or lender as assurance that, should you not pay bills or loans, these can be taken to offset default. Simply stated, a lender will want to know what your assets are and to what degree they can be held in "guarantee" against the chance of the loan or bill not being paid. While a creditor or lender does not want to take ownership of these assets, such could be the case when nonpayment (default) on the bill or loan takes place. 

Credit Score

This is a metric by which your payment history is assessed and determined. It demonstrates to a creditor or lender your ability to pay back debts. Currently, a credit score must be at a minimum of 650 for a lender to consider offering a loan. The higher the credit score, the better for the borrower. An ideal score is in the high 700-800 range. Any scores less than 650 stand a slim chance of getting a loan or being approved for additional credit.
If you are seeking a business loan, the first thing you should do is obtain a complete credit report with a detailed payment history and credit score. If you find that your score is 650 or less, the first thing you need to do before attempting to obtain a business loan is to resolve your low credit score issue. One way to do this is to seek out services from an established and accredited credit counselor. While a fee will be incurred, you will have the benefit of expertise in how to best pay off and consolidate debt. You should only obtain your credit report from reliable agencies such as Experian, Dunn & Bradstreet, and Transunion. Also, your report should be no older than six months prior to when you seek a business loan. 

Capacity

What is your ability to repay the loan? Do you have a job or another income source? Have you held your job for a long time? Do you have other debts? What does your personal and family financial situation look like? Often a lender or creditor will have you complete a Personal Financial Statement (PFS), which shows your net worth. Your net worth is all your assets/income minus all your expenses. Lenders and creditors use this information to determine whether you have sufficient retained earnings or extra money in the bank to pay for a loan. 

Capital

What are you worth? Do you have other assets, such as a savings account, car, or certificate you could use to repay the debt?

When you seek funding through a loan from a bank or an associated lender, it is wise to consider the implications of the 5 Cs. How you handle credit transactions determines your creditworthiness in the future, and it will affect your access to credit and its cost.


At the Duquesne University SBDC, we assist entrepreneurs in all aspects of determining creditworthiness and how to maneuver through the lender assessment process. Click here to request free consulting, or contact the SBDC for additional help and information.

Rich Longo is a Business Consultant with the Duquesne University Small Business Development Center where he assists new and existing businesses with developing and implementing business plans. He is also certified in Technology Commercialization. Rich has extensive experience with Federally Qualified Health Centers and has been a Senior Vice President of Network Management for Devon Health Services, Inc., one of the largest regional PPOs in the Northeast. He has been an adjunct faculty member at Robert Morris University and the University of Pittsburgh.