If you are interested in seeking funding, the background credit checks that are conducted by banks, credit unions, and other prospective lenders will determine your credit worthiness by evaluating the 5 Cs of credit. This is especially true if you have a need for funds to start a new business. By creating a thorough and well-documented loan request with a comprehensive business plan, the lender that you are approaching will better understand your business needs, you, and your credit. The 5 Cs of credit are considered to be the basic component of any type of consumer credit check or credit analysis. In this brief guide, you will be introduced to the 5 Cs of credit that are evaluated in background credit checks.
The first “C” of credit evaluation stands for “Capacity”. Essentially, this component pertains to your ability to repay the money that you have an interest in borrowing. The lender will have a desire to know how you intend to repay the amount that you borrow. You must provide information pertaining to the cash flow associated with your business and the amount of time you believe it will take to repay the loan. The lender will evaluate the information that you provide to determine if the probability of you successfully repaying the loan is high. In addition to the information that you provide, the background credit checks performed by a lender will also review your payment history and the credit-based relationships that you have with other companies, lenders, and/or financial institutions.
The second “C” of credit analysis stands for “Capital”. This is the money that you have already invested within your business. It also outlines the amount of money that you have to risk should complications arise and the business fails. Lenders that perform background credit checks for applicants will want to ensure that you have invested into your business before asking them to make an investment.
The third “C” of consumer credit checks for business startups stands for “Collateral”. These are, in basic terms, guarantees. Collateral is a type of security that you have the capability of providing to the lender. Essentially, you pledge or promise your own asset in case you are unable to repay the amount of money that you borrow. Furthermore, many lenders will require another individual to act as the “guarantee”. This is a special document in which another person signs that states that if you are unable to repay money, they will commit to paying the amount owed.
The fourth “C” of the 5 Cs of credit stands for “Conditions”. This is where you provide the lender with information on how you intend to spend the money that is obtained through the loan that you are requesting.
The fifth and final “C” of credit evaluation on background credit checks by lenders stands for “Character”. This is, basically, the impression that you make on the lender. Lenders will conduct background credit checks and will consult directly with you to determine if you possess the trustworthiness to repay the money that you have requested.
If you have a desire to start your own business, you must know and understand that it is often necessary to obtain funding from a lender to succeed in the endeavor. Before doing so, you must create a detailed loan request, a comprehensive business plan, a repayment plan, and ensure that your 5 Cs are in order. Most lenders do not have an issue with loaning money for a business endeavor, but they need some sort of assurance that you are capable of repaying the money that you are requesting. By cleaning up your 5 Cs and making sure that they are in order, you are more likely to pass the background credit checks that are conducted by lenders, thus, resulting in the acquisition of funds that you need.