Is COVID-19 the New 5th ‘C’ of Credit?

Most borrowers and lenders are familiar with The 5 ‘C’s of Credit. These are basic guidelines that lenders use to evaluate loan prospects or grade credit investments. Historically the fifth ‘C’ (or “conditions”) has been the most ambiguous category of all, serving as a catch-all designation for lenders who seek to quantify any superseding factors of how a business will perform at market. But now, in the COVID-19 era, the fifth ‘C’ has never been more more crucial or more concrete. In fact, it’s worth questioning whether “conditions” and “Covid-19” are one-and-the-same?


While The 5 ‘C’s of Credit are basic guidelines all lenders use to evaluate loan prospects, determine creditworthiness and grade credit investments; the weightiness given to each category may differ based on individual lender, institution or bank. Regardless, business owners who understand the 5 ‘C’s put themselves in a superior position to obtain approvals.

Traditionally, the 5 ‘C’s’ are:

  • Character: Are you, the business owner, honest and upfront in your interactions with the lender? What financial narrative is reflected in your credit history?
  • Capacity: Do you have the ability to repay the loan? What is your debt-to-income ratio?  Do you meet the required debt service coverage ratios of your lender or program?
  • Collateral: What assets do you possess that can be used to back or securitize the loan?
  • Capital: This is colloquially referred to as having “skin in the game,” meaning lenders want to know how financially and personally invested you are in your business. In other words, what of your personal equity is invested in your business?
  • Conditions: What conditions affect your long-term success as a business? What economic, industry or environmental factors affect your  projections? What relationships with vendors or industry partners provide you competitive advantage? What gaps do you need to fill?

Again, the 5th category has generally been an ambiguous one. But not anymore. Now the 5th ‘C’ is crucial to determining your future successes as a business owner. And, it’s all the more helpful in determining your strategic direction when you consider “conditions” and “Covid-19” as one-and-the-same.

As of early March 2020, one-third of all jobs in the United States became “vulnerable.” Small business employees, in particular, became most endangered, with approximately 30 million individuals and 54 percent of employees at risk for losing jobs as industries continue to shutter or evolve. While small businesses have long been the lifeblood of the U.S. economy and a proving ground for entrepreneurs, even the most innovative of owners have generally held only a 27-day cash shield (or “rainy day” buffer) before the pandemic began.

So how will the COVID-19 crisis change the way business owners operate in the future?

For the foreseeable future, lenders and investors will consider just how well a business navigated 2020. COVID-19 was not a test anyone asked for, but it’s one all business owners and their employees received. In this case, “conditions” or the 5th ‘C,’ shape all other credit criteria. Here are a few ideas for handling the 5th ‘C’ well:

  • Grow the tree: You may have heard the age-old adage that the best time to grow a tree is twenty years ago. For business owners grappling with new and steep financial implications as a result of the pandemic, this is apt counsel. Lenders and investors will no longer classify the 5th ‘C’ by nebulous industry conditions, but by how well you’re navigating current conditions. Record your reality as much as possible and study the pandemic’s effects on your market. By accounting and analyzing how your business is operating in the day-to-day, you will solve for growth opportunities in your future.
  • Protect your people: Are you caring for your employees? Are you considering their financial health and physical safety, using programs or grants at your disposal? Your loyalty to your people’s wellness now determines their loyalty to you in the future. It also indicates positively about your character and your personal investment to build a quality brand.
  • Forecast, forecast, forecast: Taking meticulous financial accounts during your financial valleys will provide you invaluable data points. Use this information strategically to determine where your business can evolve or pivot in the future.  Determining core and brand values during lean times will keep your business aligned during growth.
  • Pivot: What opportunities should you seize or abandon based on current conditions?
  • Remote culture: Are your employees plugged in to your short-term plans? Your long-term vision? Are you helping your team collaborate well through remote means and innovative thinking?
  • History repeats itself: While countless healthcare workers and epidemiologists are working around-the-clock to contain the pandemic and normalize everyday life for U.S. citizens and their economy, are you preparing your business for all possible contingencies? Future waves of the coronavirus?
  • Tell your story: Every business has a story. What will yours be? How well you are navigating the 5th ‘C’ of Covid says everything about you as both a brand and an investment. How well you navigate the impacts of COVID-19, and communicate the experience, determines whether your market audience wants to stay with you during and after the pandemic.

At Loan Mantra, we help businesses prepare today for their financial success tomorrow. Let us help you grow your tree, tell your story and prepare for additional loan requests and funding now!