The 5 Cs of Credit: What They Are, and How Lenders Use Them

Getting a small business loan is no small feat. It takes organization, foresight, and the ability to be realistic about business objectives–even if you are maintaining ambitious goals. But the need for a capital infusion is something that most business owners run up against during their business journey: according to Fundera, 43% of small businesses across the U.S. applied for a loan in 2020

For entrepreneurs and business owners looking to access financial services, knowing what lenders look for in loan applicants is key. Specific criteria can vary based on the type of lending institution one is looking to work with, but most lenders determine the loan readiness of a potential borrower by looking at The 5 Cs of Credit. This method incorporates both qualitative and quantitative aspects to determine creditworthiness–leading to a well-rounded, contextualized profile of a business. 

So what are The 5 Cs of Credit, and how does a mission-based lender like California Capital use them when working with clients in need of a loan? 


The applicant’s credit history  

An applicant’s history of loan repayment or defaults is a major factor in determining creditworthiness, and in many cases is considered the most comprehensive element. Lenders will look at an applicant’s credit report, which is produced by one of three major credit bureaus: Equifax, Transunion, or Experian. Credit scores–a number produced by an institution like FICO rating an individual’s credit health–are used by lenders to help evaluate a borrower’s creditworthiness, but the full credit report is essential. Often, mission-based lenders like California Capital take a more comprehensive approach. 

“California Capital does not have a minimum credit score. We are more interested in understanding the story behind the credit issues of a borrower,” explains Judy Fletcher, California Capital’s Chief Lending Officer. “In other words, we offer the borrower the opportunity to explain the situation that led to a less than healthy credit score and what [they are] doing to improve their credit standing.” 

While mission-based lenders take a holistic view of applicants’ credit histories, Ms. Fletcher cautions that there are standards. “If there is an extensive number of late payments, collection accounts, or charge offs, then we may not be able to approve a loan request.”

In addition to keeping records and documents as organized as possible, business owners preparing to apply for funding should take care to address credit issues to the best of their ability before applying. 



Also referred to as “cash flow”, capacity looks at whether a business has the capacity to handle debt, in the form of a new loan, based on their income. Will the business have sufficient cash flowing in every month to cover loan payments? 

Historical cash flow is important for most lending institutions. Traditionally, most banks want the cash flow existing businesses over the previous three years to have a ratio of 1.25. California Capital’s underwriting guidelines allow for a 1.0 cash flow ratio. 

Unlike most banks, Ms. Fletcher points out, California Capital will consider applications from start-up businesses–not just established businesses. “[We] look to how prepared the borrower is in regard to the business plan and projections. Is the business plan well thought-out, complete and [does it]explain the ‘why the business, why now and why me?’ questions of a solid business plan,” she says.  

Along with working with a business counselor to ensure their business plan and financial projections are pristine, start-ups who are new to their industry should make sure they know the difference between a balance sheet and a Profit & Loss statement–also known as an income statement–to accurately determine their capacity.  



Applicants are expected to contribute funds separate from the loan into their businesses, a contribution called an “injection”. This is essentially the cash–“capital”–put towards a potential investment by the applicant. When borrowers have what is called “skin in the game”, lenders consider them to be less likely to miss loan payments. 

This means that if a business owner is applying for a loan to purchase, for example, a new food truck for their restaurant business, they will need to invest a certain percentage towards the total cost, as a down payment. Most lenders will require at least a 20% injection in the business, while California Capital allows for a 10%-20% injection depending on how much the applicant has invested in the business already. (Factors such as industry experience and credit history also affect a lender’s ability to be flexible with cash investment requirements). 

For potential borrowers looking to strengthen their ability to contribute towards an investment, Ms. Fletcher’s advice is straightforward: save your money, as well as any receipts or invoices for business spending, as they could count towards your contribution. 



To ensure against a complete loss, most lending banks require some tangible asset to be taken as collateral. This could be land, property (such as a vehicle or other physical capital), or residence. To ensure equitable access to financial services, California Capital approaches collateral slightly differently.  

“Many of our borrowers do not own homes or have collateral they can pledge, which is why they come to us for financing,” explains Ms. Fletcher. California Capital does require, at minimum, a UCC-1 filing on business assets. “If we are financing a truck or a piece of equipment with a cost or value that exceeds $5,000, we will take a lien on that equipment or truck.” That is fairly standard practice. 

“But if, for example, the loan is for working capital (salaries, utilities, marketing, advertising, lease payments), and there is assets to take as collateral, then California Capital will still offer a loan assuming the business demonstrates the ability to repay the loan and other of the 5 Cs of Credit are met (i.e. industry experience, cash contribution, healthy credit).”  

One way in which California Capital operates loan guarantees similarly to traditional lenders is that any business owner who has 20% or more ownership interest in the company must personally guarantee the loan–meaning they promise to pay back the loan if the business fails. 



The details of a loan, such as the interest rate and amount of the principal amount, can be affected by the conditions of a business, the industry, and the economy. This can also be the proposed uses of the loan (i.e., if it is intended to be used on specific physical capital), and is influenced by the applicant’s preparation. 

“We [also] take very seriously the experience a borrower has in the industry, how prepared they are in asking for a loan, the types of training they have taken, if they’ve reached out for technical assistance when needed, who they have on their team –CPA, bookkeeper, attorney, business advisor,” explains Ms. Fletcher. 


While all lending institutions approach The 5 Cs of Credit a bit differently, applying for a loan is a thorough process. Potential borrowers should be ready to provide detailed documentation, but should also be hopeful about the opportunities available to them. Criteria are strict, but resources are available. California Capital considers all applications, whether start-ups or existing businesses, and does not restrict lending to particular industries. 

Any entrepreneurs ready to take the next steps towards loan-readiness should connect with a business counselor, or attend one of the Women’s Business Centers free webinars.