There comes a moment in every entrepreneur’s journey where personal savings are no longer enough to fuel the next big step. Knowing how to transition from your own pockets to a professional loan can be the difference between a smart growth move and a costly mistake.
In my last post, we looked at what it means to be capital ready, the internal work required to ensure you have a clear purpose for funding and a realistic plan to afford it. (If you missed that guide, you can catch up here.)
Once you’ve done that self-assessment, the question becomes: Is a lender ready for you?
When you walk into a bank, a lender isn’t just looking at your passion or your product; they are evaluating a specific set of benchmarks to measure risk. Understanding what’s happening on other side of the desk allows you to present your business in the best possible light. Most lenders rely on a framework known as the 5 Cs of Credit to determine if you’re prepared to take on debt responsibly.
Here is what lenders look for when they evaluate your fundability:
- Capacity: This is your ability to repay. Lenders look closely at your cash flow to see if the business can cover the new loan payments alongside your existing debts.
- Capital: This is your “skin in the game.” Lenders want to see that you’ve personally invested in the business. When you’ve put your own money on the line, it gives them more confidence to do the same.
- Character: This is your professional reputation. In addition to a credit score, lenders consider your experience, references, and history to decide if you are a trustworthy borrower.
- Collateral: These are the assets you pledge to secure the loan—such as real estate, equipment, or inventory. It acts as a backup plan for the lender if the business’s cash flow falls short.
- Conditions: This covers the “big picture.” Lenders look at how you intend to use the funds and how external factors, like the economy or industry trends, might affect your success.
While every lender weighs these factors differently, they form the foundation of almost every lending decision. Understanding the 5 Cs helps you anticipate their questions, improve weak areas and submit a much more competitive application.
Use the checklist below to evaluate how prepared your business is to pursue traditional financing. This is not a test to pass or fail. It is a tool to help you identify strengths, gaps and next steps before approaching a lender.
