The 5 Cs of Credit and How They Affect Your Self-Storage Loan Application

A lender’s decision to loan money to a self-storage owner, developer or investor isn’t based on rocket science but rather a few key principles. Learn how the 5 Cs—character, capital, conditions, collateral and cash flow—are used to determine your creditworthiness.

Terry Campbell

November 23, 2018

5 Min Read
Credit score on computer

A lender’s decision to loan money to a self-storage owner, developer or investor isn’t based on rocket science but rather a few key principles. The core of any loan process is the credit analysis, which is used to determine the risk associated with making the loan and the likelihood it’ll be repaid. In business financing, it’s not just a matter of evaluating the company but assessing the person or people associated with its ownership and operation.

Most credit analyses use five categories, known as the five Cs, to evaluate loan risk: character, capital, conditions, collateral and cash flow. Documents such as personal tax returns, personal financial statements (PFS), resumes, business tax returns, interim profit-and-loss statements, balance sheets and business plans all help paint the picture of a borrower’s five Cs. Let’s take a closer look at what the categories mean and why you should pay attention to them before you seek self-storage financing.


Can the lender trust you? Your aggregate traits define your character. Through each interaction the lender has with you, it evaluates and determines your honesty and integrity. It needs to feel confident that applicants have the background, education, industry knowledge and experience required to operate the business in question. This all amasses to answer whether you can be trusted to run the self-storage operation successfully and, ultimately, repay the loan.

All business owners have a personal financial history that helps forecast a picture of future behavior. There are many factors that influence loan approvals, and personal finances and credit can have a significant impact on your ability to borrow money for business purposes. A lender will examine personal credit reports and the PFS of borrowers and guarantors associated with the loan.

Your credit report is your payment track record. It compiles your debt story in one place and reveals how successful you’ve been at repayment. Payment history is one of the largest factors to your credit score, which is also based on revolving credit availability, age of accounts, collections, personal bankruptcies, and liens and judgments. Balances, credit limits and payment history are reported from credit cards, student loans, mortgages, car loans and other lines of credit. It’s wise to check your reports before speaking with a lender. If there are any delinquencies, be prepared to explain them.


When you ask to borrow money, it’s only natural for the lender to question the personal investment, or capital, you plan to make or have already made in the business. Contributing your own assets shows you’re willing to take a personal risk for the sake of the business, that you have “skin in the game.” The amount needed varies depending on the size, use and type of loan you’re requesting.

To assess your personal financial position, the lender will request a PFS. This is simply a summary of your assets (things of value that you own), liabilities, debts or obligations. From these numbers, you can calculate your net worth, which equals assets minus liabilities. Keep in mind that depending on the lender and type of loan, a positive net worth may not be required to qualify.

Your PFS is another indicator of your financial responsibility. The types of assets and liabilities you accumulate begin to reflect long-term planning or short-term spending behaviors. Accumulating credit-card debt, even in small amounts, can appear as a less-favorable type of spending behavior than large student-debt balances used to invest in your education or a reasonable mortgage for a house. Savings is also important, as it shows the lender you’re living within your means. There’s no silver bullet; your PFS will be looked at differently during each stage of your life.

When it comes to your PFS, consider these two questions: Does it align with your past and current job positions, and does it reflect a history of responsibility when it comes to managing your personal finances?


This is how the lender determines what the money can be used for and the health of the industry. There are several things that factor into a lender’s evaluation of industry conditions at any given moment. The overall premise is the lender is gaining perspective on what the loan will be used for, what will be taking place, the status of the business, and the status of the profession and marketplace economy. Lenders like to see positive trends and strong business plans with thought toward growth and continuity, but any business will be analyzed based on its unique marketplace and industry dynamics.


Lenders aren’t interested only in what happens if everything goes well. They also must consider worst-case scenarios. For instance, what if you choose to not repay the loan?

Collateral helps solve this problem by acting as a secondary source of repayment. Lenders will consider the value of the business and personal assets of the guarantors as potential security for the loan. Collateral also acts as a psychological motivator, as people tend to get more resourceful when they have something to lose. It’s an important consideration, and its significance varies based on loan type. Any lender should be able to explain the types of collateral needed for your specific situation.

Cash Flow

To ultimately approve the loan, your lender will want to be comfortable with how successfully your firm can repay it. In business financing, there’s a different paradigm in evaluating repayment ability than in consumer financing. With business loans, repayment ability comes from the performance of the business being evaluated.

The capacity to repay comes from cash flow, which is the amount of cash available after ordinary expenses have been paid. Your business should have sufficient income to support its expenses and debts comfortably, while also providing principals’ salaries sufficient to support personal expenses and debts. Cash-flow management is an imperative skill for any small business owner, including one in self-storage.

The five Cs are the pillars of a typical credit analysis. They help lenders evaluate self-storage owners and their business to better understand the risks in making a loan and determining the likelihood that it will be successfully repaid.

Terry Campbell is general manager for the self-storage lending division of Live Oak Bank, which specializes in financing for facility acquisitions, construction, expansion, refinancing or renovation. He has more than 23 years of self-storage industry experience as a supplier as well as ownership in self-storage projects. For more information, call 910.202.6933; e-mail [email protected]; visit

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