Sailing the Five C’s

This is the first of an occasional series of articles on the needs of local small business, deriving from this year’s Civic Council forum, Growing a Business in Park Slope, held in March 2011.

As executive director of a nonprofit lender that has made 176 business loans in recent years to start-ups and existing businesses, I want to share the lender’s perspective. As a business owner, you will be in a stronger position to obtain financing by knowing how they think.

First, you have to recognize that you are the risk-taker, and thus stand to reap a considerable financial return on your investment. Lenders, meanwhile, are not your partners or investors, and you should not approach them with the idea that they will take on risk. They only want to be assured that their loan will be repaid. They are investing someone else’s money and have a fiduciary responsibility to ensure the safety of those funds.

As a business owner, you need to know the fundamentals of how lenders analyze risk. Their starting point is the 5 C’s: credit, capacity, capital, collateral, and character.

  • Credit: Your credit report is used to predict whether you will repay a loan by extrapolating from how well you paid your past debts. Recurring late payments, exceeding your credit limit, being at the upper limit of your credit scores, and having collection activity on your record are factors that lower your credit score. You need to know what your credit report says about you before you ask for a loan. You are entitled to one free credit report annually (at Good credit means a “FICO score” above 700; if it is less, you need to improve it. But keep in mind that lenders also use your debt-to-income ratio to gauge your capacity to repay new debt.
  • Capacity: You would not have surgery by a surgeon who had never operated before. Similarly, a lender expects a borrower to have experience relevant to their business or have assembled a qualified management team.
  • Capital: You must have “skin in the game.” The lender will look for you to contribute equity to your own business before they will lend you the rest.
  • Collateral: Lenders want a second means of repayment if your business can’t repay the loan, and will ask for as much collateral as they can lien. They are not in the habit of making unsecured loans, despite your assurance that the business will be a success.
  • Character: Lenders assess whether the owner will work hard to save his or her business when times are tough. You must show that you have a realistic appraisal of your business’s potential, particularly in the start-up years, and have been successful at what you have tried in the past.

When you finally go for a loan, remember that first impressions count for a lot. Before you approach a lender, do your homework. If someone else writes your business plan, you will not know what lies behind your financial projections. The business plan imposes the discipline on you to think through every facet of starting and operating your business, which enables you to speak with confidence to the lender.

Also, don’t use a consultant or accountant to speak to the lender. It is your character that the lender wants to assess, not your spokesperson’s.

Lenders have a finely attuned ear to overstated nonsense. Be realistic about how long it will take to establish your business, so you can quickly establish your credibility.

Take responsibility for your own actions if you have a blemished credit history. If you blame others, it will signal to the lender that you will similarly evade responsibility for repaying them if you encounter a rough patch.

So how can you find a lender? In this environment of tight credit, I recommend that you explore the so-called alternative lending community at Empire State Development’s website, This branch of the agency has a social mission and therefore lends to businesses that banks ignore: start-ups, immigrant owners, those with no credit history, or women and minority entrepreneurs, among others. Unlike the banks, they will take the time to understand your business if  you are well prepared when you approach them.

—  Peter Bray, a member of the Civic Council, is executive director of the NYC Financial Network Action Consortium (NYCfNAC), which packages and underwrites business loans for credit unions throughout the city (see for more information).

 from the May 2011 Civic News