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If you are looking for funds for personal or professional purposes, then to gain this capital you look to apply for a loan. But getting loans approved by financial institutions not a cakewalk. However, there are ways to ease this process. You can do so by assessing your financial situation from the perspective of the lender and then figure out whether you are credit ready or not. Lenders tend to evaluate your loan application based on the 5 Cs of credit.

What are the 5’C of credit

In any sport, it is important to both envisage and evaluate what the opposition is trying to do to win the game. Similarly, in the field of loans, it is important to see things from the perspective of the lender and understand their requirements to maximize the chances of securing a loan of the desired amount. Luckily, one does not need to rack his/her brain too much as there are a few set parameters on which lenders judge the borrower’s creditworthiness and ability to repay a loan. This system is called the 5 Cs of credit - Character, Capacity, Capital, Conditions, and Collateral.

How to master the five C’s of Credit


What is character

The lenders are less interested in your moral character and more on your financial character, i.e. to see what kind of trustworthy borrower you have been and your reputation as a businessman. Lenders trust responsible and organized businesses that are more likely to make the repayments on time.

How it is assessed

Character is analysed by thorough checking of your credit reports and credit scores of both your business and personal credits, your market reputation of running a stable firm and verification via references.

Ways to master it

At first, raise your credit score before applying for loans by repaying your old debts. Stay professional while dealing with lenders and leave a lasting impression with your knowledge of the business and experience in the field. Try to build a personal rapport with the lenders.


What is capacity

Capacity means evaluating a person’s ability to repay the loan and is calculated in terms of cash flow, i.e. the cycle of income and expenditure. Capacity matters for lenders as they check how much profits you have been making lately and if your financial health is good enough to afford a loan and repay it without delays or defaults.

How it is assessed

It is analysed by checking cash flow statements and projections, bank statements, debt service coverage ratio (DSCR), and debt-to-income ratio (DTI). All these documents tell the lenders about the cash flow in the business at present and how it will be shaping up in the near future. DSCR and DTI ratios establish how much money is being spent on paying business and personal loans, respectively.

Ways to master it

Increase the income and lower the expenses. Use accounting software to get the cash flow statements and projections. Improve your DSCR and lower your DTI as more cash invested in the business is seen as a good sign, but more personal loans are seen as an additional burden.


What is capital

Capital is money you have already invested in your business and the amount of money you are seeking to invest.  

How it is assessed

Larger the sum you have invested in the business, bigger is the possibility of getting the loan. It establishes your intent of making the business grow and such a person is likely to repay the loan. Lenders also check what kind of investments you have made and what dividends have they paid.  

Ways to master it

Invest money in the business and earn some profits out of it before applying for loans. Keep a blueprint ready explaining how you will be using the loan money to increase the profits and thus, repay the loan on or before the deadline.  


What are conditions

Simply put, conditions are the terms and conditions levied on the loan and how they might be changed vis-à-vis any changes in the economy. It is a measure taken by lenders to minimize the chances of losing money.   

How it is assessed

Lenders put conditions on the use of the loan and the interest rates. They check industry risks, competitors in the market etc. Some industries are so risk-heavy that lenders do not entertain their requests.  

Ways to master it

Explain where you will invest the money – inventory, staff, investments, and collaborations – to up your returns. Always apply for a loan when the cash flow is good and business is booming to get better terms and conditions. Getting loans will be difficult when your business or the whole economy is going through a rough patch.    


What is collateral

These are assets like home, jewellery, car, and other valuables that can be pledged as security. A collateral makes the loan a secured loan as financial institutions can seize and sell them in case of defaults.

How it is assessed

Some lenders settle for specific collaterals like a property or home, but some want a blanket lien or a personal guarantee.

Ways to master it

Evaluate your assets’ market price and the depreciation rate. Be careful about what you are willing to put on stake and find a lender who gives loans on favourable terms.

When it comes to loan applications, knowing what lenders want is a bonus. Using the 5 Cs of Credit, you can evaluate your chances of getting a loan and improve on any of the departments where you are lacking. One cannot score a ten on ten on every C but make sure you have excellent ratings in some and are at least above average in the others. In the end, it is aimed at establishing yourself as a credible borrower in front of the lender.

Did You Know


The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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