In commercial lending, lenders typically evaluate borrowers using the 4 C’s of credit. These are the key factors banks and financial institutions look at before approving a loan:
- Character – The borrower’s reputation, trustworthiness, and credit history. Lenders want to know if you have a record of paying debts on time and handling obligations responsibly.
- Capacity – Your ability to repay the loan, based on income, cash flow, and existing debt obligations. This is often measured using debt service coverage ratios (DSCR).
- Capital – How much money the borrower has invested or is putting into the deal. Lenders prefer when borrowers have “skin in the game” because it lowers their risk.
- Collateral – The assets you pledge to secure the loan (e.g., real estate, equipment, accounts receivable). Collateral provides lenders with a backup source of repayment.
👉 In some modern lending models, lenders also include a 5th C: Conditions (economic environment, industry trends, loan purpose, and terms).
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