You’re probably already aware that your credit score plays an important role in determining your eligibility to obtain a business loan or line of credit and that’s why it’s more important than ever to know what the 4 C’s of credit are.
However, what most don’t know about the 4 c’s of credit is what specific factors lenders look for within that overarching category.
When determining your eligibility for a loan, lenders look for what are called the ‘4 C’s of credit’ and, in fact, they stretch beyond just your credit score.
The number and type of factors vary somewhat depending on the lender, however, the four C’s of credit were created to help simplify and clarify the loan process for small business owners looking to obtain a loan.
It can be looked at like a guiding light to help understand what lenders and other funding companies look for when evaluating a business for credit
What are the 4 C’s of Credit?
The 4 C’s of credit are as follows –
Collateral
Typically appearing in the form of property or other physical assets, collateral is any asset a borrower can offer to secure a loan.
If the borrower defaults on the loan, the assets they used as collateral can be seized. Many small business owners are wary of secured business loans because of this reason as they require hard collateral that is tied to your personal assets. Many business owners are and have the right to worry about crossing the line between business and personal. Making a business mistake shouldn’t have to affect your personal assets.
Fortunately, unsecured business loans often don’t require collateral, and if they do, it’s a form of ‘limited’ collateral such as a portion of business sales which isn’t required to be paid back if you go out of business, meaning the risks are much lower.
Capital
Capital refers to any business asset that can be sold to make loan payments. This includes available money and cash savings, investments, properties with equity, and other assets that you could sell or use to quickly obtain cash.
If business drops off and you’re unable to pay your loan payments for a time, lenders want to see that you have liquidity to cash out on so you can continue to make payments on time.
Capacity
Capacity refers to your business’ ability to make the revenue needed to pay back a loan.
Lenders don’t just want to see that you have assets you can use to pay off a loan (or which they can secure to do so), they want to see a history of being able to make regular payments regardless of those assets.
Character
The final ‘C’ in the 4 C’s of credit, lenders determine character by reviewing the borrower’s personal credit history and calculating several factors together.
Factors taken into account include:
- Your total amount of debt
- Delinquent accounts
- Available credit
- And whether you make payments on time
If you’re in need of a small business loan but don’t believe you can satisfy all four C’s of credit, don’t worry, there are several other options available. Now that you know what the four C’s of credit are you can easily understand how to prepare yourself and your business when you try to pursue a lender for any sorts of funds.
At Excel Capital, we provide a variety of financial solutions which we can offer even if you have bad credit.
Click here to complete our short application to get in touch with one of our financial specialists to see how we can help.