The 5 Cs of Business Financing

Ways to Better your Odds at Getting a Loan

By Shawn Lester, Partner Lester Landau Chartered Professional Accountants, for more information, contact 867-222-5445 or

“Never underestimate the power of your character and the value of your effort and expertise.”

Why would you need additional finances? There are many reasons.

For example, you could find that you are paying your bills faster than you are collecting your revenue resulting in the need for a working capital loan. You may want to expand your facilities, therefore, requiring a mortgage or construction loan. In the North, it could be that you need to finance your sealift order each year as the financing cost is less than the airfreight cost of bringing in goods more frequently. The key is the ability to tell or show your story in a way that demonstrates to the lender/investor that they will get their money back in the expected timeframe.

What is the difference between a lender and an investor? Lenders provide money with certain terms and conditions and do not usually get involved with your business. They typically are relatively hands-off but require regular reporting and meetings. Investors typically provide money, expertise and have terms and conditions that allow them to be more involved in your business. In Nunavut, we also see a few organizations that are lenders but set up the terms to be more of a helping hand investor.

If you have ever looked at diamonds, you have heard about the 5 Cs of diamonds. The first four are consistent (colour, carat, cut, clarity) and the fifth can cost, certification, or confidence, depending on who you are dealing with. Also, the order of importance of the Cs depends on what you are looking for in the diamond and its purpose.

In business, lenders and investors have a similar 5 Cs grading system. Improving your understanding of the grading will help you when looking for financing or an investor. Each lender/investor will have a different set of criteria and a different order of importance, but they all follow a similar pattern to the following:

Character – Your reputation as a borrower and businessperson. Do your business and personal credit reports show that you are a good risk or not? What is your general reputation in
your community?

Capacity – Your ability to repay the loan. Is your business prosperous? How much cash do you have on hand? Do you have assets that can be turned into cash quickly (liquidity)? What does the future look like for your business, community, and industry (economic conditions)? Most of this is graded using
ratio analysis.

Capital – Your (and other investors) contribution to the business. What have you put in and how much of it is still available? Sometimes your effort and expertise can be treated as “sweat equity” to help improve your story.

Collateral – Your ability to provide security. Does the business have any real estate, equipment, inventory, accounts receivable or similar kinds of assets that can be used to reduce risk to the lender?

Conditions – Terms of the loan. What are the interest rates, fees, renewal periods, repayment terms, guarantees, etc.?

Key takeaways:
1. Improve your understanding of the 5 Cs of financing (big-picture approach);
2. Improve your ability to apply simple ratio analysis to your business (financial details);
3. Improve your understanding of who you are dealing with (lender, investor, hybrid); and,
4. Develop your story based on your understanding.

One last thought: Numbers are only part of the story. Never underestimate the power of your character and the value of your effort and expertise.

Learn more about financial resources by going to and checking out our training and toolkit page and our sources of financing page. ABQ

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