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Posted: May 12, 2009

The five C’s of credit, plus one

Character, cash flow, collateral, capital and conditions are all key elements to unlocking the bank vault

Michele Falivene

Have you ever heard the perception that banks only lend money to people who don’t need it? While that’s far from true, many business owners could use a better understanding of the criteria banks consider before lending money. Most people will tell you that “credit” is the basis, but today, more than ever, bankers should  revisit “the five C’s” of credit to make more thorough and well-rounded decisions. Today, banks should be making portfolio vs. credit decisions, and it behooves everyone to understand what this means. 

Good credit is imperative for everyone – individuals and businesses alike – to optimize borrowing power and lower loan interest rates. The five C’s of credit - character, cash flow, collateral, capital and conditions – are all key elements to unlocking the bank vault. And I propose a sixth C: culture.

 Character counts

Lenders should know their borrowers as people and as citizens of the community. The larger the loan, the more requirements for underwriting, including examination of the borrower’s personal credit history. Maintaining good credit is essential, and someone who isn’t managing their personal obligations is a higher-risk borrower even if the business they represent is a different legal entity. It’s the people who assure payment back to the bank. Traditional social conventions, such as presenting yourself in a professional manner when meeting with a lender are still important too. It shows respect.

Cash flow

Bankers want to know how and when the loan is going to be repaid. They will look at the business’ cash flow and the assumptions that can impact it. A good business plan, including cash flow projections and their presentation should be in place. At least two fiscal year-end financial statements, including balance sheets and profit-and-loss statements, in addition to a current-year interim statement are very important. Going into a meeting with a loan officer should be likened to a sales presentation. It is admirable and appreciated if you show them you have carefully thought out your business plan, the potential associated risks – and that the details in the plan are reasonable.


Collateral can also be an important factor in getting a loan because securing the loan reduces the lender’s risk. Banks tend to have more rigid collateral requirements for start-up businesses, but if you are working with a good community-relationship banker, there should also be options. A good lender has the ability to say “no” to one scenario but propose options that provide the bank with security and the borrower with the ability to obtain the loan. If you are confident in what your business is doing, you should be willing to put up the security for the bank to get started. 


Capital is often the most difficult of the “C’s” for businesses to provide. This is however, a more attractive option for banks. They require that the loan be guaranteed and requirements for capital, like collateral, tend to be stiff for young new businesses. One mistake that small businesses often make is managing their balance sheets for tax liability exclusively – as opposed to building retained earnings in the business, paying appropriate taxes and commanding the loans necessary to grow. When a business owner is willing to put more of their own net worth on the line, the bank is more likely to support the loan.


The economy and market conditions will have a direct impact on the bank’s decision-making process. Projections of the business’ potential will be considered more in today’s economy than ever before. What will your revenues and cash flow be like in five years? Is the loan requested for the right period of time, and what impacts will marketplace conditions have on the business during that time?  

The new “C”

Banks and businesses alike might be better served to have similar cultures. If you have a business or professional firm that you’re trying to grow, it’s most likely that you’d appreciate a community bank with a strong philosophy centered on the fact that people matter most. How about employees? Are your bank tellers and lenders always there when you need them, or do you notice a high turnover? How does the bank’s culture compare to your company’s? Knowing the culture of the lender could be just as important for the business owner. Different banks focus on different types of loans. Some banks are more transactional, some are more personal and relationship driven. 

As always, keeping the important tenets of good business practices in the forefront of everyday activity pays off.

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Michele Falivene is senior vice president of First American State Bank in Greenwood Village.

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