“The 5 C’s of Small Business Credit” – John Baker, Prime Meridian Bank

“Our future is shaped by our past … so be very careful what you do in your past.” —Ziggy

As a small business owner, there may be few things more challenging than deciding if and when to seek financing.  It may help to know that your lender, likewise, has a challenge: whether or not to make the loan.

Many bankers use these five C’s when evaluating a loan request: Character, Capacity, Capital, Collateral, and Conditions. It is a good idea to understand these factors so you are better able to help your banker help you.


For lenders, Character is the most difficult factor to quantify. It is often the most important. Ratios and risk factors aside – in the absence of a crystal ball — the lender must ultimately make a judgement on the likelihood the loan will be repaid.

Credit score is one tool used to gauge a borrower’s willingness to repay. Know your own credit score? You should. It will keep you from being surprised during the application process if lower than you expected. Seek help if needed but work to remedy any issues you find.

The three credit reporting agencies (Equifax, TransUnion and Experian) each offer one free credit report per year. Set a reminder every four months to check your score. Rotate between the agencies to maximize use of free reports.

Lenders may use Google searches to find public information regarding past credit issues. Google yourself from time to time. See what a potential lender might see and be ready to discuss if the issue comes up in conversation.

Past credit issues do not always mean you are headed for a denial. It just means you should be ready to explain the details.


Lenders will want to know your business has the capacity to repay a loan. Ratios such as Debt Service Coverage Ratio (DSCR) are often used to determine whether your business can cover payments.

You can determine this yourself by calculating your company’s cash flow (or EBITDA): Earnings Before Interest Taxes Depreciation and Amortization. Then take this value and divide by your total debt service.

DSCR = EBITDA/Total Debt Service

Most lenders consider a ratio of 1.2x acceptable.


Do you know your net worth? Do you or your company have cash on hand to repay a loan if cash flow slows down? Financial reports and Personal Financial Statements (PFS) often reveal whether you have enough on hand to cover debt payments without adversely affecting business operations.

Many lenders provide PFS spreadsheets or you can use personal finance software tools to update one yourself. It’s a good exercise to do this anyway. Finances can change over time and staying aware of what’s happening is a good practice.


Lenders will want to know what, if anything, will secure the loan. If collateral is pledged, what is its value? Determining the value depends on the type of collateral.

  • Real estate requires an appraisal.
  • Market values for vehicles, boats and equipment are based on recent sales prices.
  • Accounts receivable are also used for collateral.  Be careful, though, as most accounts over 30 days may be discounted as only a portion will be considered collectable.


Understand the trends in your industry to explain why lending to you is a good decision. Most bankers have experience with a range of businesses and will ask questions about your particular industry.

For instance, let’s say you own the only widget company in town and dominate the market. That may or may not be a positive. Perhaps no one else is in your industry because the widget is obsolete or the market is slowing.

What about your competition? Are you aware of what they are up to? Understanding your place in the market – and being able to explain that to a lender – is very important.

What If My Bank Says, “No”?

A lender that determines your borrowing might be too risky can be doing you a favor by not lending to you. Lending decisions must be right for both the borrower and the lender. They must also be legally, morally and ethically correct.

If not, both may ultimately suffer the consequences. If they meet these tests though, theoretically, there’s a way to accomplish anything.

About Prime Meridian Bank

Headquartered in Tallahassee, Florida, Prime Meridian Bank offers a broad range of business and personal banking services. Founded in 2008, the Bank serves its primary market of the Tallahassee Metropolitan Statistical Area, but also serves clients in the North Florida and South Georgia markets. The Bank currently has three office locations, two in Tallahassee, and a third in Crawfordville, Florida.  For more information about Prime Meridian Bank, please visit www.primemeridianbank.com. Member FDIC. Equal Housing Lender. NMLS# 393620.