Lenders look at five things: your track record of paying debts, your cash flow to repay this loan, the money you have in the business, the assets backing the loan, and the purpose and conditions around it. Bankers call these the five Cs. Every lender weighs them differently, which is why the same file can be declined by a bank and approved by an equipment lender the same week.
The Federal Reserve's 2025 Small Business Credit Survey shows how often owners miss on these. Among employer firms that applied for a loan, line or advance, 42% got the full amount, 36% got part of it and 22% got nothing.
The five Cs in plain English
| C | The lender's question | What they read |
|---|---|---|
| Character | Do you pay what you owe? | Personal and business credit, past defaults, liens, how you answer questions |
| Capacity | Can this business carry this payment? | Cash flow, bank deposits, existing debt payments |
| Capital | How much of your own money is at risk? | Owner equity, retained earnings, down payment |
| Collateral | What do we recover if it goes wrong? | Equipment, receivables, real estate, cash, guarantees |
| Conditions | Does the purpose and the moment make sense? | Use of funds, industry, economy, loan size and rate |
SouthState Bank describes them the same way: character starts with the credit score and the full report, capacity measures your ability to repay, capital is what you have put in, collateral is what you pledge, and conditions cover the purpose of the loan and the economic and industry backdrop. It also notes that financing that generates future cash flow tends to be viewed more favourably than money for renovations.
Character: your record, and your candour
Character is mostly your credit. A lender wants to see payments made on time, no recent collections and an explanation for anything old. See understanding your credit profile for how to read and repair it.
Character is also how you deal with the lender. An owner who discloses a tax lien in the first call looks very different from one whose lien turns up in a search. SBA lenders ask direct character questions about criminal history and past federal debt, and a wrong answer there ends a deal faster than a low score.
Example: Two owners each have a 660 FICO. One has a two-year-old charge off on a supplier account, settled, with a short note explaining a customer bankruptcy that caused it. The other has the same charge off and says nothing. The first gets a conversation. The second gets a decline.
Capacity: the one that decides most deals
Capacity is cash flow against debt payments. Lenders measure it with the debt service coverage ratio: cash available for debt payments divided by the debt payments themselves. A ratio of 1.25 means you earn $1.25 for every $1.00 you owe in payments. The SBA 7(a) Loans guide notes most lenders want 1.25 or more.
Example: A distribution company earns $300,000 a year before interest, depreciation and owner draws beyond a fair salary. It already pays $96,000 a year on a truck loan and a line. It asks for a $250,000 term loan over five years at about $62,000 a year.
- Total debt payments: $96,000 plus $62,000 = $158,000
- Coverage: $300,000 divided by $158,000 = 1.90
That clears 1.25 comfortably. At $500,000 the new payment would be about $124,000, total payments $220,000, and coverage 1.36, still fine for many lenders but tighter. For how to size the request, see how much your business should borrow.
Capacity is also why too much existing debt is a top reason for declines. The Federal Reserve's survey found 37% of denied firms were told they already had too much debt, and 29% were told their sales were too weak.
Online lenders read capacity straight from bank deposits rather than tax returns, which is why they move faster and set revenue floors instead of coverage ratios.
Capital: skin in the game
Capital is the owner's money already in the business, plus any down payment on this deal. A business that has reinvested profits for years looks stronger than one that distributes everything and borrows for growth.
Example: A restaurant owner wants $400,000 to open a second location. If she puts in $80,000 of her own cash, the lender's risk falls and so does the loan. If she wants 100% financing, most banks will say no regardless of her credit.
Equipment and real estate deals usually expect a down payment. Working capital products rarely ask for one, because capacity carries those decisions.
Collateral: what backs the loan
Lenders take what is there. Equipment lenders use the machine. Factoring companies use the invoices. Banks take a lien on business assets and often real estate. Most lenders also ask for personal guarantees from the owners.
The Federal Reserve's survey found 29% of denied firms were told they lacked enough collateral. That does not mean you need a building. It means the product has to match the assets you have. A term loan broker will steer an asset-light service business toward cash flow lenders and an equipment-heavy one toward lenders that value the fleet.
Conditions: purpose, industry and timing
Conditions cover the use of funds, your industry and the wider economy. A clear, productive purpose helps. The SBA lists eligible 7(a) uses including working capital, equipment, real estate, refinancing business debt and changes of ownership, up to $5 million. Lenders like that kind of clarity everywhere, which is why a short use of funds statement is worth writing.
Industry is part of conditions too. The Federal Reserve's survey found 29% of denied firms were told lenders do not approve financing for businesses like theirs. Some lenders avoid trucking, restaurants, construction or cannabis adjacent businesses entirely. Others specialise in them. That gap is where a broker earns their place.
Floors by product
Every product sets minimums before the five Cs are even weighed. Published examples:
| Product | Time in business | Revenue | Personal credit |
|---|---|---|---|
| OnDeck term loan or line | 1 year | $100,000 a year | 625 FICO |
| Bluevine line of credit | 12 months | $10,000 a month | 625 FICO |
| SBA 7(a) | No fixed floor, but cash flow must cover payments | Must support the debt | Weighed with the full file |
Approval odds also differ by product. The Federal Reserve's survey found full approval rates of 71% for auto or equipment loans, 48% for merchant cash advances, 45% for lines of credit, 37% for SBA loans and 35% for business loans. The products backed by a specific asset or by daily sales approve most often. The ones that lean on the whole business approve least.
A pre-application check
Before you call a broker, score yourself on each C:
- Character: Do I know my score, and can I explain every negative item in one sentence?
- Capacity: Does my cash flow cover all debt payments, new loan included, at least 1.25 times?
- Capital: How much of my own money is in this, and can I show it?
- Collateral: What assets back this request, and are any already pledged?
- Conditions: Can I state the purpose in two lines, and is my industry one lenders know?
Any weak C points to a different product rather than a dead end. Search the register by loan type, and look for verified entries with fees in writing. Every entry carries a register number and last checked date, so you can confirm who you are dealing with before you send a single statement.
Questions owners ask
What is the most common reason business loans are declined?
In the Federal Reserve's 2025 survey, 46% of denied firms were told lender requirements were too strict for them, and 37% were told they already had too much debt.
What debt service coverage ratio do lenders want?
Most lenders want cash flow of at least 1.25 times the total annual debt payments, including the new loan.
Do I need collateral for a business loan?
Not always. Online working capital loans often rely on cash flow and a personal guarantee. Banks and SBA lenders take the collateral that is available, and equipment loans use the equipment itself.