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Using the 4 Cs of Credit to Assess Bank Expectations

Using the 4 Cs of Credit to Assess Bank Expectations

March 12, 2023

What goes into a lender's decision to extend credit? How do lenders decide how much credit to offer? Although the answers may vary from day to day and lender to lender, there are common factors that all lenders consider when making credit-related decisions.


Below, we explain more about what is meant by the ‘4 Cs of Credit’ and how consumers seeking a business loan can use these factors to their advantage.


The 4 Cs: Character, Capacity to Repay, Capital Assets, and Collateral


Being denied credit can be a blow in itself — and now it also reflects a lack of personal character?! Rude! However, while the title of this factor could feel insulting, "character" in this context refers only to your financial history. (Another way to think of this particular 'C' term is "credit history").

Some factors that can affect your credit history and your credit score, include:


  • High debt-to-income ratio
  • History of late payments
  • Delinquent or "charged off" accounts
  • Amount of credit available
  • Number of credit inquiries (or "hard pulls") you've made recently


Personal credit can be different from business credit. In some cases, you may rely on your personal credit to get your business credit profile off the ground. In other situations, you may want to keep your business credit entirely separate from your personal credit.


Capacity to Repay

The second C involves a borrower's ability to repay credit pursuant to a lender's terms.


In a personal lending context, the capacity to repay usually refers to income. But in a business loan context, the scope can be far broader. For example, if a loan is secured by assets that can be seized to ensure repayment, the borrower's cash flow may be less relevant, as the lender will have other repayment avenues to pursue. The interplay between the fourth C ("Collateral," discussed below) and the capacity to repay can often be crucial.


Capital Assets

If your business has assets—from machinery and equipment to inventory, real estate, or fixtures—these assets can be considered when applying for a loan or line of credit. However, banks may not place as much weight on this category as others, especially if these assets are depreciating or difficult to liquidate.



The final C, collateral, is broader than capital assets. In addition to physical or tangible property, collateral can include things like goodwill, community support, and—most importantly to many lenders—available cash. Collateral may also include personal assets that a business owner or stakeholder pledges to secure a business loan.


Using the 4 Cs to Improve Your Credit

Now that you know what lenders are looking for, how can you ensure that your credit profile is as strong as it can be? Consider these steps:


  • Review your credit report, paying special attention to any delinquent marks like late payments or charged-off accounts.
  • Keep detailed business records and create a pitch to show banks that your business can, does, and will continue to generate revenue.
  • Have your business assets cataloged and appraised.
  • Consider pledging your own assets or acquiring a business partner.


Even in tough lending environments, there are steps you can take to improve your odds of being approved for the credit you need.


Important Disclosures: 

Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.

This article was prepared by WriterAccess.

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