Understanding what the C’s of credit mean

Most people who have ever applied for a loan or looked into manufacturing equipment financing have heard the phrase, “we’ll have to check your credit.” Now that sounds all fine and dandy, but what does it actually mean? 

Banks or lenders will analyze your credit, or more specifically, the characteristics of your credit, to determine the risk associated with the loan. The characteristics of credit are better known as the five C’s of credit and they are the framework institutions use when evaluating borrowers. The five C’s are character, cash flow, capacity, conditions and collateral. Equify Financial also takes into account a sixth C: common sense. 

Understanding what the C’s of credit mean can help companies better position themselves to lenders in order to grow their business. 


Your character is your general reliability and trustworthiness and the most important factor in making a credit decision. Character can usually be assessed by past credit history, management experience, references, ability to maintain a clean record over time and stability of relationships with customers and creditors. A credit report is generally collected to review repayment history and track record with other loans. Your character is evaluated so the lender knows that you have the background, education, industry expertise, and more to run and successfully operate the business. 

Cash flow

Cash flow can demonstrate the company’s ability to repay the loan or manufacturing equipment financing. Cash flow is assessed by looking at the net profit from operations, plus non-cash expense items included in the operating state that can go towards fixed payment installments. The components of a company’s cash flow include net profit from operations, depreciation, depletion, amortization of intangibles and deferred taxes. 


Capacity refers to the overall balance sheet of the company. This is discovered through analyzing the relationship between current and noncurrent assets and liabilities and the liquidity of those assets. Some standard industry ratios that will be looked at include debt-to-income ratio, working capital ratio, liquid ratio and more that will be compared year to year to identify trends through the years. 


This C considers the industry of your business, how well your business is doing, and what you’ll be using the money for. The economy and industry of your business will be evaluated to see if they will affect your ability to repay the loan. Seeing how well your business is doing will help reassure the lender that you are operating under favorable conditions. The lender will then know what the money is going towards and how it will help you further succeed and grow. 


Collateral is the assets your business has that can help you to secure the loan. For example, your assets can be any equipment your company has, working capital, accounts receivable, or inventory that can be used to repay the loan if you are not able to. Collateral-backed loans are sometimes referred to as secured debt. Extensive collateral protection is not enough to be approved for financing, there must be a balance between credit strength and the extent of the collateral. 

Common sense

All of the other five C’s have to fit together in a reasonable way that makes sense. Bad character with great collateral does not support a rational approval. Common sense allows for a more clear understanding of a company’s financial standing and success for both parties involved. 

Equify Financial

We’re a hands-on lender who is able to provide an extensive amount of knowledge and in depth understanding of your circumstances and financial situation. We can help you with manufacturing equipment financing and more to bring more capital to your business. Connect with us to learn more.

Contact your local equify financial representative

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