Business Loans

The 3 Cs of Commercial Credit

Apr 23, 2024 • 4 min read
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      The 3 Cs – character, collateral, capacity – summarize the elements that a financier uses to underwrite a loan. This technique of assessing the client comprises both qualitative and quantitative measures.


      Character refers to the borrower’s reputation. The shareholders who are going to guarantee the loan and the management of the business will all come under scrutiny to determine if they are reliable and will repay the funds.

      The lender will usually look at the credit history of the business owner to gauge honesty and reliability. Considerations may include:

      • Whether or not they pay bills on time.
      • Whether or not they’ve used credit before.
      • How long they’ve been in business, and what positions they held before starting the business.
      • How long they’ve lived at their respective addresses.

      Lenders will also look at the credit scores of the owners of the business. This score is numeric, typically between 300 and 850, gleaned from the info in your credit report. High scorers generally have a lower risk. Each lender has its own standards, but many of them use credit scores to assist them in making their evaluations. It all depends on the level of risk they find suitable for a particular credit product.

      Credit scores are weighted as follows: 35 percent payment history, 30 percent amount owed, 15 percent length of credit history, 10 percent new credit, and 10 percent types of credit in use. 


      Collateral is any asset used to secure the loan. Savings, real estate, inventory, accounts receivable, and equipment are all assets that could be used as collateral.

      The lender asks for collateral because, in the event of insolvency, it can be sold or collected to generate funds to pay the loan. Since in the experience of most lenders asset classes such as prepaid amounts, goodwill, and investments will not raise any significant amounts, they are generally not considered for collateral.

      If you’re using a property as collateral, its location and quality, and its adaptability are some of the features your future lender will look at.


      Most commercial credit officers refer to capacity as cash flow, and it represents the ability of the company to repay debt. Since a big down payment will reduce the risk of default, the lender will consider any capital the borrower puts into a potential investment. In short, the lender is looking at how much debt the borrower can comfortably handle. The following are usually requested from the borrower for the lender to evaluate cash flow/debt service:

      • Business tax returns
      • Historical financials, such as the balance sheet and profit & loss statements, interim financials, and/or projections
      • Personal financial statements for each guarantor
      • Rent rolls for leased property

      If you’re considering a business loan, understanding the 3 C’s will give you a high-level understanding of what a potential lender will look for. Visit this post for more in-depth information on business loan requirements.

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      About the author
      Lendio Editorial Team

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