What Lenders Look at When You Apply for a Business Loan

These five characteristics make up the framework that banks use to evaluate potential borrowers.

Once you establish a business, credit bureaus can begin to gather information about it through sources like business registrations, incorporation filings, online directories and payment data from lenders. That’s why building good business credit is a crucial part of owning a company. 

The information in your business credit report helps lenders determine a business’ creditworthiness by looking at how it handles financial obligations, like payment history and credit usage. 

The stronger your business credit, the fewer obstacles you may encounter when you need financing to help your business grow. 

A strong business credit report can positively affect your bottom line by possibly helping you get better funding options, such as 

  • Lower financing costs on loans and credit cards
  • Better credit terms from suppliers
  • Lower insurance premiums

When determining business financing decisions, lenders focus on the following five “Cs” of credit.

The stronger your business credit, the fewer obstacles you may encounter when you need financing to help your business grow.

1. Capacity

One of the first items lenders try to determine when assessing business credit is the owner’s capacity to repay the loan. 

They’ll consider household income, business revenue, cash flow, outstanding debt, unused credit lines, and the amount of money the owner has personally invested into the business. All these variables will help lenders calculate the ability for an owner to repay the loan.

2. Character

Before loaning money to a business, lenders must assess the owner’s credit to understand how likely they are to repay funds. Credentials, education, experience, references and reputation add depth to this character portrait. 

Things like delinquent accounts, large amounts of unsatisfied debt or pending lawsuits could be seen as warning signs and cause lenders to avoid granting the requested funds. 

3. Collateral

Potential lenders will be interested to see if there are business assets that could help secure the loan. 

Having tangible or intangible assets like vehicles, inventory, real estate or accounts receivable typically assures lenders that the owner is unlikely to abandon the business.

4. Capital

If business owners have made personal financial investments into the business, lenders tend to view that favorably. They can measure financial commitments to the business in resources or capital, such as stocks, equipment and property. If owners are seeking a large loan, business capital will be scrutinized more closely.

5. Conditions

The future success of the business depends on a number of external conditions, which potential lenders will evaluate to make sure the business is headed in the right direction. 

To assess the risk, they’ll take into account the competition, economy, conditions of the industry, and local environment. 

If business owners are able to show that conditions are favorable for continued growth, it’s more likely that they'll secure the needed financing.

Understanding the five “Cs” of business credit can help you better prepare for the questions you may be asked the next time you apply for credit.


The information contained herein is shared for educational purposes only and it does not provide a comprehensive list of all financial operations considerations or best practices. This information does not represent any opinion, guidance or recommendation, whether formal or informal, of Capital One, National Association, or any of its officers, directors, employees, advisors, attorneys, consultants, affiliates or subsidiaries (collectively, “Capital One”). Nothing contained herein shall give rise to, or be construed to give rise to, any obligations or liability whatsoever on the part of Capital One.

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