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Updated: March 27th, 2020
From real time cash flow to Yelp reviews, have you ever wondered what online lenders actually look for? If so, it’s time you learned about the the “5 Cs of Credit”.
Lenders all have their own proprietary formulas when it comes to distinguishing the star applications from the ones that could use a little improvement, but most lenders follow some variation of the “5 Cs of Credit” to help them make the best decision.
At Funding Circle, we respect the fundamentals—and we add our own cutting-edge process to the mix in two ways that help us stand apart from other term loan lenders.
First: we believe small businesses deserve a better borrowing experience, and transparency is integral to how we deliver on this promise.
Second: we understand that for small businesses, time is money. That’s why we work to make our application process as fast and straightforward as possible. You can apply online in under 10 minutes, and get funded in under a week!
For small business owner Jimmy Standley (Sole Bicycle Co.), our timing and responsiveness made a huge difference in his ability to be ready for busy season: “One bank kept us dangling for three months before pulling out. With Funding Circle, we got funding within seven days. It was so fair and easy.”
So what traits do we look for in your loan application? Our credit and underwriting team is guided by the 5 Cs of Credit: Collateral, Capital, Capacity, Conditions and Character.
Collateral refers to any property or asset that a lender might ask of you to secure a loan.
In case of default, the lender can seize your collateral to make up for its losses. At Funding Circle, your business loan is secured by both your business and a personal guarantee by the owner of the business—that’s you!
A personal guarantee is a document that states that you will be liable if your business is unable to meet its debt obligation. Because we’re a cash flow lender, we look at the viability of your business first—and your assets second.
To us, the potential of your business is the biggest factor!
Capital represents how much “skin in the game” you have in your business. The more capital you’ve invested, the stronger signal we receive about your commitment to the success of your business.
At Funding Circle, we don’t define a precise measure of “enough capital.” Flexibility is key: we review each and every application in a way that’s customized to your situation and business profile.
Capacity, in this context, is your business’ ability to repay the loan. We look at a few factors here.
First, is the recurring nature of your cash flow. It’s always a good sign when your net cash flow is positive, month after month. We look for businesses that have fairly consistent sales, a steady flow of contracts, and those who regularly reinvest cash back in to grow your business.
Second, is your history with previous credit relationships. Delinquencies or derogatories are red flags. We know that not everyone has a perfect credit score, so show us a history of responsible repayment for extra points!
Third, we’re interested in your cash flow projections. Are you landing a big contract soon? Is your busy season around the corner? We care about how your business performing right now, but we also take its future potential into account. For the math whizzes out there, here’s a metric that we calculate that plays an important role in how Funding Circle thinks about your capacity: Debt Service Coverage Ratio (DSCR). Pro tip: ask your accountant for help with calculating your ratio!
DSCR = (Personal Cash Flow + Business Cash Flow) / (Personal Debt + Business Debt + New Debt)
Conditions are circumstances that may affect your loan, such as the use of proceeds, product fit, industry-specific risk, competition and your local market.
There are a lot of factors that are outside your control, so it helps us to know that you’ve thought about the future and have a good plan to weather local competition and minimize your risk.
It’s always smart to have a clear idea of what exactly you’d spend your funds on: Do you need new equipment? A bigger sales team? Working capital to cover slow accounts receivables? Let us know!
Character is a lender’s overall opinion of a your trustworthiness and credibility. Most often, a lender’s primary evaluating criteria for character is stability, which can be determined from questions like: What’s your credit score and history like? Do you make payments on time? How long have you been in business? How much experience do you have within your industry?
One simple way to demonstrate your integrity is through your social media footprint. Positive customer reviews on Yelp, for example, show that your business is successful and has potential to grow. Or, your polite response to a negative comment on your company’s Facebook page shows you are invested in providing the best experience or product possible for customers.
Are you looking for a better 5 Cs of Credit experience than your bank has to offer? Apply for a loan with Funding Circle to help you take your business to the next level this year!
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.