An Introduction to the 5 Cs of Credit

Let’s say that you’re an entrepreneur.

Maybe you’ve just established your microenterprise as a legal entity, but haven’t really been able to get started because you can’t afford operations. Maybe, on the other end of that spectrum, you’ve been running the family business for the past five years and for some reason – whether it’s because of cash flow management issues or broader socioeconomic conditions – your current revenue won’t cover all the salaries of the new employees you need to hire for a new location. Regardless of the circumstances, there is a range of potential funders that can help mobilize or sustain business operations.

Potential funders include conventional banks, community lenders, alternative institutional lenders (such as BOC Capital Corp.), online funders, family and friends, as well as you and investment partners. Every funder comes with a unique set of conditions and lending capacities, some of which may be better suited for certain funding requests and types of businesses than others.

Regardless of those differences, what all of these funders have in common is how they evaluate your creditworthiness and request as a whole – also known as “The 5 Cs of Credit:” character, capital, capacity, collateral, and conditions.

  1. Character. Character focuses on your personal qualities and trustworthiness as an applicant to meet obligations (usually the repayment of loans). Employment history, past management abilities, personal and credit references, and credit score can all play a factor in character assessment.
  • Capital. Capital is based on the amount of cash and other assets you have invested so far, and your ability to invest more in the business, if needed. Capital, in other words, can be thought of as your “riskiness.” The more money you request and the less business investments you’ve made, the riskier you seem. But don’t be discouraged – there are ways to demonstrate your potential to invest more, and not all funders value capital the same way.
  • Capacity. Capacity assesses your ability to generate cash flow that can be used to service the interest and principal on a loan. Funders want to see consistent revenue and income, and to know exactly how their money is being used to increase cash flow.
  • Collateral. Collateral is the asset(s) you pledge to your lender as security for a loan. Should you default, the lender takes your collateral as partial payment. Collateral tends to be specific property, like real estate, vehicles, and even current assets such as inventory.
  • Conditions. Conditions are concerned with 1) the use of funds and the likelihood of success, and 2) the conditions of the local economy or your industry’s economy. Funders are interested in an existing demand for your services (or the burgeoning need for them), and the business’ longevity.

The 5 Cs of Credit are used in most funding decisions, if not all. But again, specific funders may stress some Cs more than others. For example, if your potential funder is a family member, then they might not care about Character as much as a conventional bank would, because they already know you. An online funder/crowdfunding platform is unlikely to be concerned with collateral because the funds raised are typically donations. But understanding all of the Cs and their influence is highly beneficial when identifying funders and gauging your request’s success rate.

If you’re interested in developing your understanding of the 5 Cs and funders’ rationale for their decisions, you can learn more at WE NYC’s WE Master Money: Funding, provided throughout the 5 boroughs. Contact Monique Keith at for information on upcoming workshops.