Building Business Credit

SCE Federal Credit Union Provides Business Owners with the Five "Cs" of Credit - Cash Flow, Captial, Collateral, Conditions and Character

Oct 14, 2011 | Business

There are two main sources of business credit: a financial institution or credit terms given by suppliers. Using a planned approach is essential to successfully build business credit. It's important to have an idea of what you need to be considered for a loan or negotiate credit terms.

To determine your credit worthiness, lenders use what's commonly called the five "Cs" of credit – Cash Flow, Capital, Collateral, Conditions and Character.

Cash Flow (capacity to repay) is the primary factor. The lender needs to know how your business will generate the repayment. Establishing business credit will need proof of affordability and you'll often be required to provide detailed Cash Flow figures. Your Cash Flow ultimately determines the timing and the probability of successful repayment of any loan or small business line of credit. A review of your past credit history, both personal and commercial, will be taken into consideration.

Capital is the money you have personally invested into your business. Lenders will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before considering a loan. In the eyes of the lender, if you have a significant personal investment in the business, you are more likely to do everything in your power to make the business successful.

Collateral is any additional form of security to guarantee a loan. For a startup business, the lender may require that you pledge some of your personal assets. As an existing small business owner you may be asked to pledge business assets such as equipment, buildings, inventory or accounts receivable. A personal guarantee is also required on all business loans.

Conditions focus on the intended purpose of the loan and how that relates to the general business climate. Will the money be used for working capital, additional equipment or inventory? The lender can determine the relative stability of the environment in which your business will operate, often providing greater insight into local and regional issues that could affect your industry.

Character is also a critical factor in establishing business credit. It's how you present yourself to the lender, along with your credentials, educational background and experience in your industry. It plays a large role in negotiating credit terms with suppliers. At first, you may only be granted a small limit on short payment terms. Pay on time, every time, and after a number of months you'll be in a position to negotiate a larger limit or longer terms.


As a small business owner, be aware that establishing business credit isn’t something done at once, but is a part of an ongoing process, which will contribute significantly toward your success. A history of steadily improving business Cash Flow, Retained Capital in the balance sheet from making profits, and a clean payment history to your trade suppliers will rapidly build your credit worthiness.