The 5 C’s of Credit: How Banks & Lenders Decide Whether to Approve Loan Applications

If you’re applying for a loan, you’ll want to know what banks and other lenders are looking for so you can increase your chances of getting approved. Lenders often request financial documents such as tax returns, bank statements, and balance sheets. They also typically pull your credit report. These documents guide lenders in deciding whether to approve a loan application, the amount they will lend, the interest rate and terms, etc.

Each lender evaluates these documents differently and applies their own standards to decide if you’ll get approved for a loan. Baltimore Community Lending uses credit reports and financial statements as a guideline for conversations with applicants so they can explain the circumstances behind the numbers. We recognize that credit reports and financial statements alone don’t tell the full story, which is why we don’t have a minimum credit score requirement for our small business loans and real estate loans. Startup entrepreneurs can submit projections if they don’t have historical documents.

No matter the lender’s specific standards, your creditworthiness is evaluated based on the 5 C’s of credit:

  1. Character: Your track record for repaying debts and what your credit says about you as a potential borrower. Even if you’re requesting a loan for your small business or real estate project, the way you manage your personal finances is a major indicator for how you will manage the finances of your business or project.
  2. Capacity: Your ability to repay the loan based on your existing debt and current/anticipated income. Lenders want to be assured you’ll be able to repay their loan along with your other debts. It’s helpful to have a back-up source of repayment, such as job income, in case something goes wrong with your business or project.
  3. Collateral: Assets owned by the borrower to be forfeited to the lender if you can’t repay the loan. The property being purchased often serves as collateral for real estate loans. For small business loans, banks often require the entrepreneur to put up their personal property if the business does not have any assets. However, Baltimore Community Lending does not require collateral for small business loans.
  4. Capital: Money you’re putting toward, or have put toward, the small business or real estate project. Investing in your business or project demonstrates your commitment and reduces the risk of default. An example might be a real estate developer putting down 10% of the cost of the property.
  5. Conditions: General circumstances relating to the loan, as determined by the lender. This could include your level of experience in the industry, the property location, etc. It could also include factors outside of your control such as the state of the supply chain or industry trends.

Click To Learn More About the 5 C’s Of Credit

As a mission-based community development financial institution, Baltimore Community Lending also evaluates a sixth C: Community. Specifically, the impact your project will have on the community and your relationship with the community. If your business or project has a social mission in the Greater Baltimore Metro area, we want to hear about it. Contact us if you’re interested in a small business or real estate loan:

Small Business

Phone: 410-319-0732

Email: SmallBusiness@bclending.org

Real Estate

Phone: 410-862-0938

Email: RealEstate@bclending.org