SBA Loan Advice for Entrepreneurs

"5 Cs of Credit, Keys to Small Business Lending"
- David Brown

Access to credit is one of the most important hurdles for entrepreneurs to overcome. When applying for a business loan it is important to keep in mind the key items every lender will consider when analyzing a loan application. Best known as the “5 C’s of Credit,” these key items are: Capacity,Collateral, Capital, Conditions, and Character. Understanding the 5 C’s will better prepare a small business owner for the application process.

Capacity represents the business’s ability to repay debt. Lending institutions will review historical and projected financial performance to determine whether or not the business can repay the requested loan. The business’s cash flow must meet a ratio above the proposed debt repayment to ensure repayment even if there is a decline in performance.

Collateral is security for the loan as a secondary source of repayment. In most instances, collateral consists of business assets acquired with the requested loan. Lending institutions will always discount the current value of the collateral to a more realistic liquidation value. As a result, lending institutions will not lend “dollar-for-dollar” when assets are being acquired. At times, lending institutions may require additional collateral.

Capital represents the equity invested in the business by the owners. Capital provides a cushion for a business to rely on during periods when cash flow is tight. Also, Lending institutions will ensure that the owners have sufficient personal investment to remain dedicated to the business should difficult times arise.

Conditions speak to the economy in which the business operates. Lending institutions will attempt to identify the main risks for the business, industry, and local and national economy. Once these risks are identified, lending institutions will determine if the business is prepared to mitigate these risks as much as possible.

Character covers the “people” aspect of business lending. Lending institutions will assess the business owner’s management ability, experience in the industry, business references, and personal credit and integrity. Lending institutions want to feel confident that the business owner will stand by the business obligations in times of crisis.

Each of the 5 C’s plays a vital role in the decisioning process; however, if a business is lacking in one area, it does not necessarily mean that a loan will be denied. It means that the business will have to be stronger in other areas to make up for the deficiency. There are even third party resources available to small business owners to lessen the risks in some of the areas mentioned above.

One viable and popular resource to consider is the U.S. Small Business Administration (SBA) which partners with participating lending institutions. The SBA ( is an independent agency founded in 1953 with a focus to aid, counsel and protect small business interests. Support is provided through specialized loan programs and advisory services such as S.C.O.R.E offices, Small Business Development and Assistance Centers.

The SBA’s 7(a) loan program provides a percentage guarantee on the loans provided by the participating lending institutions. Depending on the loan amount, the SBA will guarantee between 50% and 85% of the loan, through what is known as the 7(a) loan program.

With the benefit of an SBA 7(a) guarantee, lending institutions can be more willing to finance a business with weaknesses in certain of the 5 C’s of Credit. Lending institutions will traditionally consider using the SBA if the borrowing business is a start-up, has inadequate collateral, has insufficient equity, or if a longer maturity is needed.

Another popular resource is the SBA 504 loan program. When dealing with long-term equipment or owner-occupied real estate purchases, the SBA 504 loan program is geared towards reducing the traditional required down payment. Traditionally, lending institutions require between 20%-30% as down payment. The main benefit of the 504 loan program is the borrower is required to put in as little as 10% towards the project and the SBA will provide up to 40% of the purchase (up to $2 million) on a longer-term (20 years for real estate and 10 years for equipment) basis.

In today’s economic environment, access to credit has become more challenging. Business owners must be more familiar with the financial standards required by lending institutions and more educated about the resources available to them, such as the SBA. In the end, most lending institutions want to help the borrower and business reach their goals and create success through the implementation of a viable financing plan.

A graduate of UMass Amherst, David Brown is an Assistant Vice President/Commercial Lending at Enterprise Bank’s Westford Office, 237 Littleton Road. A Lowell resident, Dave currently serves on the board of the United Teen Equality Center. He can be reached at 978 656 5630 or via email:

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