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Lending Criteria Used By Canadian Debt Lenders

The "C's" of a financing assessment performed by lenders, commonly known as the "Five C's of Credit," are a set of lending criteria used by sources of business financing to evaluate a borrower's creditworthiness.  

The Five C’s of Credit are made up of …

  1. Character: This refers to the borrower's reputation or track record for repaying debts. It includes factors like credit history, public profile, and business background.

  2. Capacity: This is an assessment of the borrower's ability to repay the loan. It looks at income, historical revenue trends, and debt servicing requirements. Lenders typically use measures like debt-to-income ratio to assess capacity.

  3. Capital: This refers to the money a borrower has invested in the business or the down payment for a purchase. A large contribution by the borrower decreases the chance of default.

  4. Collateral: Collateral is any asset that can be used to secure a loan. For a mortgage, the property is the collateral. If the borrower defaults, the lender can take possession of the collateral.

  5. Conditions: This pertains to the terms of the loan and how the borrower intends to use the money, along with the broader economic environment. Conditions can include the interest rate, the amount of principal, the purpose of the loan, and the prevailing economic situation.

These factors provide a comprehensive view of the borrower's financial situation and help lenders make informed decisions about different lending opportunities.

All lenders will apply the 5 C’s in some way shape or form.  Some will focus more on Capital and Capacity, while others will be much more comprehensive in their use of these assessment categories.

Each lender model will devise their own application of the 5 C’s of Credit lending criteria when assessing an application for debt financing.

Here’s a deeper dive into each of the “C’s” to give you a better idea of what lenders may be evaluating when you apply for a business financing.


From a lender's perspective, "Character" in the context of the 5 C's of credit refers to the trustworthiness, reliability, and creditworthiness of a borrower. It’s an assessment of the borrower's reputation and history in managing debt and financial obligations. Character is crucial in a lending scenario because it helps lenders gauge the likelihood that a borrower will repay a loan on time. Since lending is inherently risky, understanding a borrower's character provides insight into their financial behavior and commitment to honoring debts, which cannot be fully captured by numbers alone.

Why Character is Important:

  1. Indicates Responsibility: A strong sense of character suggests that the borrower takes their financial responsibilities seriously and is likely to prioritize loan repayment.
  2. Risk Assessment: It helps in assessing the risk involved in lending to the borrower. A good character indicates lower risk.
  3. Historical Performance: Past behavior is often considered a predictor of future actions. A history of responsible credit management suggests a continued behavior pattern.
  4. Trust Building: Lenders are more willing to negotiate better terms or extend credit to borrowers who have demonstrated integrity and reliability.

How Lenders Determine or Assess Character:

  1. Credit History and Credit Score: A thorough review of the borrower's credit report and credit score is a primary method for assessing character. Lenders look for a history of on-time payments, the length of credit history, types of credit used, and how much credit is utilized versus available.
  2. References and Background Checks: Lenders may require personal or business references and conduct background checks to verify information provided by the borrower and to gather opinions on the borrower's reliability and business acumen.
  3. Interviews and Personal Interactions: Direct interactions with the borrower can provide insights into their character. Lenders may consider the borrower's attitude towards debt, understanding of the financial commitment, and their seriousness about the business or purpose for the loan.
  4. Review of Public Records: Searching for any history of bankruptcies, liens, judgments, or legal issues that might reflect on the borrower's character and financial management skills.
  5. Social Media and Online Presence: In some cases, lenders might review the borrower's social media profiles and online behavior for any red flags or indicators of character and lifestyle that might impact their ability to repay the loan.
  6. Past Financial Relationships: The history of the borrower's relationships with other financial institutions or creditors, including previous loans and banking relationships, can be indicative of character. Lenders may look into any past issues or successes.
  7. Stability Factors: Lenders may also consider time in business, length of residence, and community involvement as indicators of character. Stability in these areas can suggest a responsible and reliable borrower.

While the quantitative measures lending criteria like income and credit scores are important, the qualitative assessment of character plays a crucial role in the decision-making process for lenders. It's about building a comprehensive picture of the borrower beyond just the numbers, ensuring that the risk of lending is mitigated by understanding who the borrower is at a fundamental level.


From a lender's perspective, "Capacity" refers to a borrower's ability to repay a loan. It is an assessment of the borrower's financial means to service debt, considering their income, expenses, and other financial obligations. Capacity is crucial in a lending scenario because it directly impacts the borrower's ability to make timely payments on the loan. Evaluating a borrower's capacity ensures that the lender is not extending credit beyond what the borrower can afford, thereby minimizing the risk of default.

Why Capacity is Important:

  1. Indicates Repayment Ability: Assessing capacity gives lenders insight into whether the borrower can comfortably manage loan repayments along with their existing financial obligations.
  2. Reduces Default Risk: By ensuring that borrowers have adequate capacity, lenders reduce the risk of defaults, late payments, and non-payment situations.
  3. Financial Health Assessment: Capacity evaluation helps in understanding the borrower's overall financial health and stability.
  4. Loan Structuring: Information about a borrower's capacity can guide lenders in structuring the loan amount, terms, and repayment schedule in a way that matches the borrower's financial situation.

How Lenders Determine or Assess Capacity:

  1. Income Analysis: Lenders review the borrower's sources of income, including employment income, business income, rental income, and any other sources. Consistency and stability of income over time is particularly scrutinized.
  2. Debt-to-Income Ratio (DTI): This key ratio compares the borrower's monthly debt obligations (including the potential loan) to their gross monthly income. A lower DTI indicates a better ability to take on and repay new debt.
  3. Cash Flow Analysis: For business loans, lenders will examine the business's cash flow statements to assess the company's ability to generate enough cash to cover loan repayments, after accounting for operational expenses.
  4. Financial Statements and Projections: Analysis of past financial statements and future projections can help lenders assess a business's capacity to repay. This includes looking at profit margins, revenue growth, and expense management.
  5. Credit History: Past management of credit can also inform lenders about a borrower's capacity. A history of managing credit well can be a positive indicator of capacity.
  6. Savings and Liquid Assets: The presence of savings and easily liquidated assets can serve as a buffer for borrowers, showing lenders that there are additional resources available to make loan payments during financial difficulties.

Lenders use a combination of these lending criteria to assess a borrower's capacity thoroughly. This analysis helps ensure that loans are provided to borrowers in a way that aligns with their financial ability to repay, thus safeguarding both the lender's interests and the financial well-being of the borrower.


From a lender's perspective, "Capital" refers to the assets or resources that a borrower can use to repay a loan. It includes the borrower's own investment in the business or project for which they are seeking financing. Capital is a critical component in a lending scenario because it represents the borrower's stake in the success of the venture. A substantial investment by the borrower reduces the risk for the lender, as it shows the borrower's commitment to the business and their confidence in its success. Additionally, it provides a cushion that the lender can fall back on in case of default.

Why Capital is Important:

  1. Risk Sharing: A borrower who has invested a significant amount of their own capital into a project is perceived to be more committed to its success and less likely to default on the loan.
  2. Financial Resilience: Capital demonstrates the borrower's ability to support the business during tough times. It shows that the borrower has skin in the game and resources to draw upon if needed.
  3. Leverage and Repayment Source: The more capital a borrower has invested, the less they may need to borrow, resulting in a lower debt-to-equity ratio. This can make it easier for the borrower to manage repayments.
  4. Collateral: In some cases, the capital itself (e.g., equipment, real estate) can serve as collateral for the loan, providing the lender with an additional layer of security.

How Lenders Determine or Assess Capital:

  1. Review of Financial Statements: Lenders analyze the borrower's balance sheet to assess the amount of capital invested in the business. This includes looking at equity, retained earnings, and invested assets.
  2. Equity Investment: The lender evaluates the amount of money the borrower has personally invested into the business or project. A higher personal investment is often seen as a positive indicator.
  3. Asset Evaluation: Lenders consider the quality, liquidity, and value of the assets that constitute the borrower's capital. This can include real estate, equipment, inventory, and other tangible assets.
  4. Collateral: The lender assesses the assets that the borrower is willing to pledge as collateral for the loan. This provides a secondary repayment source and reduces the lender’s risk.
  5. Debt-to-Equity Ratio: This ratio compares the company’s total liabilities to its shareholder equity. It helps lenders understand how much the company is financed through debt versus its own capital.
  6. Capital Contributions and Withdrawals: Lenders look at the history of the borrower's contributions to and withdrawals from the business. Frequent withdrawals can be a red flag, while additional contributions show commitment.
  7. Financial Reserves: The presence of cash reserves or easily liquidated assets provides further assurance to the lender about the borrower's ability to handle unexpected financial challenges.
  8. Business Valuation: For established businesses, lenders may consider the overall valuation of the business, which reflects its market position, earnings power, and potential for growth.

By assessing capital, lenders gauge the borrower's commitment, financial stability, and the level of risk involved in extending credit. Borrowers with significant capital investment are often viewed as lower-risk, as they have more to lose in case of failure and are presumed to be more committed to ensuring the success of their venture.


From a lender's perspective, "Collateral" refers to tangible or intangible assets that a borrower pledges as security for a loan. It's a form of protection for the lender, ensuring that there is a way to recover the loaned funds if the borrower is unable to make repayments. Collateral can include real estate, equipment, inventory, accounts receivable, and even intellectual property, depending on the nature of the loan and the agreement between the borrower and the lender.

Why Collateral is Important:

  1. Risk Mitigation: Collateral reduces the risk the lender takes on by providing an alternative means of repayment if the borrower defaults on the loan.
  2. Loan Securitization: It enables borrowers to secure a loan that they might not otherwise qualify for based on credit history, income, or other factors alone. This can be particularly important for new or small businesses without a long credit history.
  3. Interest Rate Determination: The presence of collateral often results in lower interest rates compared to unsecured loans because the lender's risk is reduced.
  4. Loan Amount: The value of the collateral can influence the amount of money a lender is willing to provide, as it directly impacts the lender's ability to recover the loan amount in case of default.

How Lenders Determine or Assess Collateral:

  1. Valuation: The lender assesses the market value of the collateral through appraisals or market analysis to ensure it covers the loan amount. This process might involve professional appraisers, especially for real estate or specialized equipment.
  2. Liquidity: Lenders consider how quickly and easily the collateral can be converted into cash. Highly liquid assets, like marketable securities, are generally more favorable than assets that may take time to sell, such as specialized machinery or inventory.
  3. Legal Ownership and Documentation: The lender verifies that the borrower has clear legal ownership of the assets being pledged as collateral, free of liens or other encumbrances that could affect the lender's ability to seize the asset if necessary.
  4. Condition and Depreciation: For physical assets, the lender evaluates the condition and potential depreciation over the loan period to ensure that the collateral will retain sufficient value.
  5. Insurance: Lenders may require that the collateral be insured against loss or damage, ensuring that its value is protected throughout the loan term.
  6. Perfection of Security Interest: The lender takes legal steps to secure its interest in the collateral through a process called "perfection," which involves registering the security interest to establish the lender's legal right to seize the collateral in case of default.
  7. Environmental and Regulatory Compliance: For certain types of collateral, such as real estate or industrial equipment, lenders may also assess environmental risks and ensure that the asset complies with relevant regulations.
  8. Future Value Assessment: In some cases, lenders consider the potential future value of the collateral, especially if the loan term is long or if the asset is expected to appreciate.

By thoroughly evaluating collateral, lenders not only secure their loan but also gain insights into the borrower's financial health and commitment to the loan. In terms of overall lending criteria, collateral assessment is a critical step in the lending process, helping to balance the interests of both the lender and the borrower by enabling access to capital while managing risk.


From a lender's perspective, "Conditions" refer to the specific circumstances surrounding a loan request, including the purpose of the loan, the amount requested, and the broader economic and industry-specific environment. Conditions also encompass any external factors that could affect the borrower's ability to repay the loan. This component of the 5 C's of credit helps lenders assess the level of risk associated with a particular loan, beyond the borrower's financials and the value of collateral.

Why Conditions are Important:

  1. Loan Purpose: Understanding the purpose of the loan helps lenders evaluate the feasibility and the risk associated with the funding request. For example, a loan for expanding a well-performing business may be seen as less risky than financing for a speculative new venture.
  2. Loan Terms: The interest rate, repayment schedule, and amount of loan influence the lender's risk. Conditions help determine the appropriateness of these terms relative to the risk profile of the borrower and the economic environment.
  3. Economic Environment: General economic conditions can significantly impact the borrower's ability to repay. Lenders consider factors like inflation rates, interest rate trends, and economic growth indicators.
  4. Industry Conditions: The health and stability of the borrower's industry play a crucial role. Industries facing downturns or rapid changes may pose higher risks for loans.
  5. Regulatory Environment: Changes in laws and regulations can affect the borrower's operations and profitability, impacting their repayment ability.

How Lenders Determine or Assess Conditions:

  1. Review of the Loan Application: The lender examines the details of the loan application, including the stated purpose of the loan, to understand how the funds will be used and to assess the rationale behind the request.
  2. Market Analysis: Lenders conduct market research or use existing studies to gauge the current state and outlook of the borrower's industry, including competition, demand, and regulatory challenges.
  3. Economic Data Review: Analysis of economic indicators, such as GDP growth rates, unemployment rates, and central bank policies, helps lenders understand the broader economic landscape.
  4. Regulatory Compliance and Changes: Lenders review relevant regulatory frameworks and recent or upcoming changes that could affect the borrower's industry and, consequently, their ability to succeed and repay the loan.
  5. Risk Management Policies: Lenders apply their internal risk assessment frameworks to evaluate how the loan fits within their portfolio, considering the current economic and industry conditions.
  6. Historical Performance in Similar Conditions: Lenders may look at how similar loans or borrowers in the same industry have performed under comparable economic or market conditions.
  7. Consultation with Industry Experts: For niche or complex industries, lenders might consult with experts to better understand the specific risks and opportunities.
  8. Borrower’s Contingency Plans: Understanding the borrower's plans to address potential future challenges can also inform the lender’s assessment of conditions.

By carefully evaluating these conditions, lenders can make more informed decisions about whether to proceed with a loan, what terms to offer, and how to structure the loan agreement to mitigate risks. This comprehensive approach ensures that both the lender and the borrower are positioned for success, even in the face of changing external factors.

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