The Five C's of Lending

These five factors are considered when evaluating loan applications, be sure to incorporate the information that addresses these items when making loan applications or writing your business plan

As a Community Futures Development Corporation, the HCDC takes into account this version of the banking industry’s classic “Five C’s of Lending”. As we are developmental lenders – and because community economic development is our number one priority – we are able to interpret and prioritize lending criteria a bit differently than traditional banks. By becoming familiar with these 5 criteria, you can ensure that your business plan addresses all of the essential points necessary to encourage investment and lenders to work with your plan and business.

1. Character

Character is a combination of your credit history, your training and work history, and any proven experience you have at running a business. Most banks look primarily at how the loan will be secured. While this is also important, HCDC is interested in your personal experience and track record too. Even the best business ideas don’t succeed without strong management, so be sure to highlight the industry skills and management experience of you or your leadership team. It’s all part of ensuring you are set up for success in business — not just loan repayment!

2. Capacity

Capacity refers to your ability to take on and repay debt based on the earning potential and cash flow of the business. Your business plan will determine the strength and marketability of your idea as well as the viability of the business. For this reason it is very important that you take the time to carefully research and thoroughly test your business concept. When applying for a loan you will need to show that there will be adequate cash flow, to ensure that you can realistically afford the loan. If you are asking for a loan for an existing business, provide historical financial statements. If you are starting a new business, create projected financial statements as well as data like industry averages.

3. Conditions

When assessing a loan request, we take great care to understand the market and conditions in which you are planning to operate your business. Is the industry mature, or emerging? What are the current political, environmental, social, and technological issues affecting the industry? To gain insight, we look at data from industry associations and government and regulatory bodies, as well as your own marketing plan research. And, of course, we factor in the ability of your business to help drive rural economic diversification — adding recognition for big potential impacts.

4. Capital

Capital includes your personal and corporate net worth, the “sweat” and real equity you have invested in the business and your ability to access other financial reserves. The goal is to ensure you have adequate capital to grow your business and to weather any unexpected emergencies or setbacks. Having insufficient capital is a common mistake for too many businesses, and we want to ensure it doesn’t happen to you.

5. Collateral

Because HCDC is a developmental lender, we place a greater focus on the management team, business capacity, market conditions, and cash flow of a business. However, we do have a responsibility to lend money responsibly, and therefore must take adequate security. We will be as creative as we can in assessing your collateral.

 - adapted from the Five C's of Lending of Community Futures Alberta