The top 5 factors that affect your ability to secure funding

If you have ever been turned down for a loan or been unsuccessful in securing credit, it was probably easy to blame the elusiveness of credit. After all, who knows how lenders assess applications and decide who gets cash? It’s all arbitrary, isn’t it? Think again. Understanding the lending process and the criteria lenders use to assess creditworthiness (the 5 Cs) is your gateway to getting credit approved. In this blog, we break down the 5 Cs of Credit: character, capacity, capital, conditions, and collateral.

Character

Character is the first C of the 5 Cs of Credit. Put yourself in the shoes of a credit lender: imagine someone with a reputation for never following through with a promise asks you to borrow cash. They promise to pay you back, but you don’t have the financial stability to risk losing money. Naturally, you pass on the opportunity to give them a loan. You could say this person doesn’t have the character necessary for you to feel comfortable loaning them money.

Lenders are likely to feel the same way. Borrowers who are caught up in a scandal or get involved in unstable industries could run into trouble when applying for credit with cautious lenders. A good example is a borrower who recently went through a media firestorm for internal corruption and who could now struggle to secure lending. After all, lenders are careful and have no obligation to lend to companies known for less-than-great character.

Capacity

Perhaps the most obvious of the 5 Cs is capacity, or how likely a company or individual is to be able to repay their debt through their income. It’s normal for lenders to ask a company for financial statements like profit loss and cash flow statements and an individual for proof of income to assess their likelihood of being able to repay existing and new borrowings.

Capital

The third C is capital. A lender will want to have confidence that you have the capital funds to complete the proposed purchase. With property development, this will often be the difference between the purchase price and the value of the loan requested (your deposit), plus the cost of the finance itself. For example, if you are buying land for $1m and the loan is $650k you would need to show that you have the $350k plus the costs to settle the loan.

Conditions

Next up is conditions. These are the benchmarks that must be maintained throughout the life of the loan. Conditions are things like:

• Can payments be made on time and in full?
• Will the person or company applying for the loan be able to maintain an acceptable ratio of repayments to income?
• Is the individual or company likely to borrow money from other lenders during the life of the loan and therefore become a higher-risk customer?
• How much capital is the borrower contributing?
• Where and in what condition is the asset that is being used to secure the loan

Lenders always consider the hypothetical success of a company maintaining conditions when determining creditworthiness. If they’re not able to meet standard conditions then they probably won’t be offered credit.

Collateral

Rounding out the Cs is collateral. Collateral is the asset against which a loan is secured. Worst-case scenario, this is something the lender can possess if you don’t pay back your loan. The better the collateral, the better the chances of obtaining credit with the best terms.

Some considerations towards solid collateral are:

• The location and condition of Land or commercial real estate a developer is purchasing
• The value of the asset in comparison to similar assets in the same area
• Potential resale limitations of the property (is it specialized therefore a smaller buyer pool)
• Things necessary for business operations like equipment and inventory.

The higher the quality of the collateral, the more willing a creditor could be to extend credit.

Thinking about applying for credit? Consider the 5 Cs to determine if your company is likely to receive credit, then be sure to submit your scenario for an initial evaluation of your funding application without having to complete a full project finance application.

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