The most challenging part for every business these days is limited access to funding that eventually results in limited growth. According to various Independent Business Reports, 50% of the small businesses with 10 or less employees have applied for some type of financing in the last couple of years and almost half of them are turned down. Monetary Authority of Singapore revealed that the non-performing loans ratio for SMEs rose from below 2% in the first half of 2014 to 3.5% in the same period of 2015. Additionally, half of the new enterprises fail to survive even for the first three years. This concern gave rise to the five Cs of credit to find one’s ability to repay the loan.

If you’re planning to apply for loans from any financial institution this year, then you should be aware of the five categories of credit that play an imperative role in credit approval. Credit categories are the same for every financial institution, but the major difference lies between the credit scoring models used by the banks and other lenders. If you’re planning to apply for small business finance from banks or a small lenders, they look for ‘scoring’ techniques along with the following 5 C’s of credit:

Character

Character justifies your reputation in the market, which lenders use to assess your stability. It includes how long you’ve been operating your business, how is your past loan experience, if any, and whether you have maintained a good record of paying the bills and suppliers. These days, it has become much easier to evaluate one’s character via social media profiles, comments, and reviews by your customers.

Capacity

The most important factor is capacity where the lenders evaluate your ability to repay the loan that also includes evaluation of your average monthly income before deciding whether to lend money or not.

Capital

Capital is the difference between your business assets and liabilities. In short, it is the evaluation of how much you own from the market and how much you owe to the market. The more positive difference there is, the better are your chances of getting the personal business loan.

Collateral

Lenders also analyze the value of collaterals deposited by the applicants to ensure loan recovery. Value of collateral is directly proportionate to the chances of loan approval, therefore, more value equals to higher chances of loan approval.

Conditions

Multiple other aspects, i.e. local economic conditions, industry type, your credibility in the market, etc. are also considered before approving the loan to evaluate the borrower’s financial situation and ability to repay.

Every lender, including banks, credit unions, as well as the online lenders look at the same five categories of credit. However, the banks look for a profitability statement minimum of 5 years from the applicant that eliminates the scope for startups to get small business loans from there. Therefore, you should focus on these five categories of credit to get funding from financial institutions and to attain sustainable growth.