Most bankers consider the three “C’s” when evaluating creditworthiness. The process typically begins with a look at the personal credit of the owners and then moves on to examine the business’s credit.


Here are the three “C’s” of business credit:



1. Character

The banker will ask, “Can I trust this person to repay the loan? Does she/he take the right action when things get tough? Have current and past creditors gotten paid in full?” Your personal credit scores and business payment histories with vendors will be reviewed by the bank.


2. Capital

If a company has difficulty generating cash, the banker will examine whether there are assets available that could be sold to repay the loan. Examples of these assets include real estate, investments, savings, and/or personal assets. To a lesser extent, banks will consider inventory and accounts receivable.


3. Capacity

Does the company generate sufficient income to repay the debt? Many banks consider the current debt service capacity and what this would look like if a new loan was taken. One way to look at the debt service capacity is by taking the current EBITDA (earnings before interest, income taxes, depreciation, and amortization) divided by current portion of long-term debt plus interest. Some banks also include rent and lease payments in the numerator and denominator. Ratios less than 1.20 to 1 are subject to more scrutiny. If the ratio is tight, be prepared for the following questions:  Could the owner take less salary if business cash flow is tight? Could rent be renegotiated? How much of the company’s costs are variable versus fixed?


David Shaffer, Kreischer MillerDavid E. Shaffer is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email


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