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Nearly all small businesses will require additional finance at some stage, which makes business loans a popular option among SMEs. Owners often ask us what lenders look for in their business loan application, or more specifically, what they will assess.

As a small business lender ourselves, we’re going to dish the dirt and reveal what’s known as “the 5 C’s of business lending”. Ready to increase your chances of a successful business loan application? Let’s get started!

Understanding the 5 C’s

When a business owner applies for a small business loan, the first thing a lender will perform is a credit analysis. This helps them to determine whether the business will be able to repay their loan successfully (or if they’re more prone to defaulting on their debt).

This credit analysis is based on 5 main factors, also known as “the 5 C’s”. These include capacity, capital, conditions, character and collateral. We’ve discussed each of these in more detail below.


Your capacity simply refers to your ability to repay the loan. Just some of the factors which come into play to determine this include your revenue, credit score, debt, liquidity ratio, and more. They do this through analysing a variety of documents, including cash flow statements, cash flow projections, and bank statements. Other key factors will also come into play, such as the success of your business thus far, your industry experience, and your future business plans.


Lenders will also want to know that you’ve made a financial commitment in the past. This could take the form of personal savings, investments or other assets that show you’ve previously invested in your business. Sufficient capital reassures a lender that you have an additional means to repay the debt obligation should your income or revenue suffer a blow.


The conditions of the loan include factors such as repayment schedule, interest rate, and the principal loan amount. When a lender assesses your application, the conditions also extend to how you plan to use the acquired funds, your competitors, your industry, and the current economy. If the economy is booming, businesses are more likely to flourish, meaning less risk for lenders. If the economy is poor, however, then lenders may be more hesitant to loan money.


A lender also places importance on your track record or reputation when it comes to your financial dealings in the past. They do this by analysing your credit reports and looking at your credit score. This report also contains information on collection accounts, judgments, liens and bankruptcies. Before you apply for a small business loan, make sure you’re prepared; know your credit score and clear up any inaccuracies on your credit reports with the credit reporting bureaus.


Collateral is a good indication that there is security underlying the loan, in the case that you are unable to repay it. With some forms of business finance, they must be secured with a valuable asset, such as a fully-paid-for personal property, equity in a home, or other property you own (such as an automobile, stocks, etc.).

Keep in mind that not all business loans require collateral. If you’re after an unsecured business loan for your SME (that offers total transparency), Lumi can help.

For more information about our unsecured business loans or how to complete our business loan application, visit our website or call 1300 00 LUMI today.

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Post Author: Luiz Bevilacqua

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