4 M's and 5 C's For Business Loans

I have been asked  many times what lenders look at when receiving a loan request (e.g. line of credit, equipment loan, owner occupied real estate etc.) for a for profit business*

My goal here is to provide information that offers some guidance on a few of the facets that are generally  taken into consideration  when a loan request is received.

Please not the ‘M’s and the ‘C’s’ do overlap.

The 4 M’s:

Money, Management, Markets and Materials are all important risk factors that are taken into consideration.

  • Money: Financial Analysis (ratios, historical performance etc.), Guarantors, Financial Preparation (e.g. audited, reviewed, company prepared ) - I have provided some ratios below.
  • Management: Ownership Structure, Succession Plan, Management Strengths, Weaknesses etc.
  • Markets: Industry the business operates, size, competitors, entry to market, customer concentration etc.
  • Materials: What is the collateral, costs, length manufacturing process, condition of inventory etc.

The 5 C’s:

  • Character/ Credit Score: What type of person are you. What is the general impression you make when people meet you?
  • Conditions: What affects the industry, segment, overall market
  • Capacity: What is your ability to repay the loan
  • Capital: The money you have personally invested in the business. This is an indication how much you have to risk if the business had to fail.
  • Collateral: What will be securing the loan (what is the quality)

 Financial Consideration:

 Balance Sheet:

 Income Statement:

  • Sales – what is the trend
  • Gross Profit Margin trend(sales – cost of goods sold)
  • Net Profit Margin trend
  • Net income
  • Earnings before income & Depreciation (EBIDA) = NI + Dep + interest +- one time event


  • Debt Service Coverage (DSCR) EBIDA/ total debt service >= 1.25. This is a measure of the business revenue to cover the cost of its loan payments. It is calculated by dividing the net operating income by the total debt service. (looking to generate 25 % more revenue that is required to cover the debtpayments)

Please take note that there are many additional factors taken into consideration besides what I have listed. The information is for guidance purposes only and to help you put together a good loan package for your lender. It will hopefully help you prepare for some of the questions that you now know that will be asked.  It does not guarantee a loan approval or a decline if you do not meet some of the criteria listed in the financial consideration.

Knowing the five ‘C’s , 4’ ‘M’s  and financial considerations is a good start in preparing yourself for a small business and lower middle market loan request.

 To be prepared is half the victory.Miguel de Cervantes

 Good Luck.

 * There is different criteria when looking at a for profit business and non for profit and if you use an SBA program