Every business lender, from a national bank to an online lender, decides on the same five things: whether your cash flow can repay the loan, whether you have a history of paying what you owe, how much of your own money is in the business, what they can recover if things go wrong, and whether the loan makes sense for your business and industry right now. Lenders call these the five Cs: capacity, character, capital, collateral and conditions. Know how each is measured and you can fix weak spots before an underwriter finds them.
1. Capacity: can the business repay
Capacity comes first because it is how loans actually get repaid. Collateral is the backup plan; cash flow is the plan.
Banks and SBA lenders measure capacity with the debt service coverage ratio. They start with your net income from tax returns, add back interest, depreciation, amortization and any one time expenses you can document, then divide that by all your annual debt payments, including the new loan. A ratio of 1.25 means you have $1.25 of cash flow for every $1.00 of debt payments. Most banks want at least that. The SBA sets its own floor on 7(a) loans, and lenders usually require more.
Two details catch owners out. First, lenders use what your tax returns say, not what your internal reports say. If you minimized taxable income aggressively, you also minimized your borrowing capacity. Second, the owner's personal finances count. Underwriters run a global cash flow that includes your salary, personal debts and living costs, especially on SBA loans and for businesses where the owner takes most of the profit as distributions.
Online lenders measure capacity differently: average monthly deposits, the trend over recent months, how much of that revenue is already committed to other daily or weekly payments, and how often your balance dips below zero.
How to strengthen it: Build a clean list of documented add backs. Pay down or consolidate small, expensive debts before you apply. Ask your accountant how your tax strategy affects the income lenders will see.
2. Character: do you pay what you owe
Character is the lender's read of how you handle obligations. It shows up as personal credit scores for every owner with 20% or more, business credit reports, payment history with suppliers, tax liens, judgments, bankruptcies, and how long you have run this or a similar business.
Underwriters care more about patterns than single events. One late payment two years ago during a known disruption reads very differently from three late payments in the last six months. Recent inquiries matter too: many applications in a short window suggest you have been declined elsewhere.
Experience is part of character. A first time owner buying a restaurant is a different risk from a chef with ten years of kitchen management buying the same restaurant. For acquisitions and startups, your resume is part of the file.
How to strengthen it: Pull every owner's credit before applying. Write a short, factual explanation for anything negative. Resolve tax liens or put them on a payment plan with documentation. Keep your business bank account in good standing for at least six months.
3. Capital: how much of your own money is in
Capital is the equity you have in the business and the cash you put into the deal. An owner with real money at risk works harder to protect it, and a business with retained earnings can absorb a bad quarter.
Lenders read capital from the balance sheet: total equity, and the ratio of debt to equity. A business whose liabilities are many times its equity is already leveraged, and new debt adds risk. For purchases, lenders look at the down payment or equity injection. Conventional commercial real estate loans often require 20% to 30% down. SBA loans commonly accept about 10% for acquisitions and owner occupied real estate, which is one of the main reasons owners choose them.
Lenders also check where the down payment comes from. Cash in the bank for months is better than cash that arrived last week from an unexplained source. Borrowed down payment money is usually not allowed, or it counts as debt.
How to strengthen it: Leave profit in the business in the year before you borrow. Season your down payment in a bank account for at least two or three months. Document gifts and seller financing in writing, in the form the lender requires.
4. Collateral: what secures the loan
Collateral is what the lender can sell if the loan is not repaid. Lenders do not value it at what you paid, but at what it would bring in a forced sale, and then lend a percentage of that.
| Collateral | How lenders typically value it | Typical advance against value |
|---|---|---|
| Commercial real estate | Appraisal | 65% to 80% |
| New equipment | Invoice or appraisal | 80% to 100% |
| Used equipment | Orderly liquidation value | 50% to 80% |
| Accounts receivable | Eligible invoices under 90 days | 70% to 90% |
| Inventory | Liquidation value | 25% to 60% |
| Business assets in general | Blanket lien | Little standalone value |
Most business loans also require a personal guarantee from each major owner. A guarantee is not a sign of distrust; it is how lenders confirm your interests stay aligned with theirs.
Some lenders lend mostly on collateral. Asset based lenders and factors size the loan to your receivables and inventory, which lets a business with weak profit but strong assets borrow. Equipment financing is secured by the equipment itself, which is why it can be easier to get than an unsecured term loan.
How to strengthen it: Keep a current list of your equipment with serial numbers and values. Keep receivables aging clean and collected. Know what liens already exist against your assets by searching your state's UCC filings, or your province's personal property registry in Canada.
5. Conditions: does this loan make sense now
Conditions cover everything outside your file: the purpose of the loan, the amount, your industry, the economy and the lender's own appetite.
The purpose matters a lot. A loan that buys equipment to fulfil a signed contract is easy to approve. A loan to cover losses with no plan to stop them is not. Underwriters want to see how the money produces the cash that repays it.
Industry matters too. Lenders track default rates by industry and adjust their appetite. Some have concentration limits and stop lending to a sector once they hold enough of it. That is why two lenders can look at the same file and reach different answers, and why matching your industry to a lender that knows it is worth the effort. Location can matter as well, since local lenders know their market and some lenders serve only certain states or provinces.
How to strengthen it: Write one page that explains what the loan is for, what it buys, and how that turns into revenue or savings, with numbers. Choose lenders that already lend in your industry; the register lets you filter by loan type and lender type to find them.
How the five fit together
No file is perfect on all five. Underwriters look for strength that offsets weakness: strong collateral can carry thin cash flow on an asset based loan, long experience can carry a short business history at a CDFI, and a large down payment can carry a weaker credit score at a bank. When you know which of your five Cs is weakest, you can choose the lender type whose model leans on the ones where you are strong, and go in with the explanation already written.
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