{PDS Sponsored Post} The 5 C’s of Credit: What a Bank Looks for When Lending to Independent Pharmacists

Here at PDS, we take pride in highlighting some of our incredible solutions partners. We know these companies have the potential to revolutionize pharmacies just like yours through their products and services. We’re excited to introduce Live Oak Bank, read on for their sponsored blog post about how to best prepare when looking for a business loan.


A bank’s decision to lend money to a borrower is not rocket science. The final decision is made based on five founding principles. At the core of any loan process is a credit analysis to determine the risk associated with making the loan and the likelihood of repayment. In business financing, it is not just a matter of evaluating the business, but also the borrowers associated with its ownership and operations.

Most credit analyses use the five C’s to evaluate the risk of a loan:

  • Character
  • Capital
  • Conditions
  • Collateral
  • Cash flow

Documents such as tax returns (individual and business), personal financial statement (PFS), resume, interim profit and loss statements, balance sheets and a business plan help paint the picture of a borrowers five C’s. Below we’ll explain each of these categories and discuss why pharmacy owners should pay attention before seeking financing for their pharmacy.

Character: Can a bank trust you?

From each interaction, the bank is determining honesty and integrity. Lenders need to be confident that the applicant has the background, education, industry knowledge and experience required to operate their pharmacy successfully. This all amasses to answer the question of “can we trust that you will be able to run this business successfully and pay back our loan?”

Business owners have a personal financial history that can help paint a picture of their (likely) 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.

Your credit report is your track record of prior debt repayment. It compiles your debt story in one place then tells a reader how successful you are at paying your debt back. Balances, credit limits, and payment history are reported from your credit cards, student loans, mortgages, car loans or other lines of credit. Payment history is one of the most significant factors in your credit score.

Tip: Check your reports before talking to a lender; if there are any delinquencies, be prepared to explain.

Capital: What is your investment?

When asking to borrow money from a lender, they’re going to ask what personal
investment, or capital, you plan to make or have already made in the business. Contributing personal assets demonstrates that you are willing to take a personal risk for the sake of your pharmacy business; it shows that you have ‘skin in the game.’

To assess your personal financial position, the lender will request a PFS; this shows a summary of your assets, things of value you own, liabilities, debts or obligations. It also indicates your financial responsibility. From these numbers, you are then able to calculate your net worth, which is assets minus liabilities.

Accumulating credit card debt, even in smaller amounts, can appear as a less favorable type of spending behavior than larger student debt balances used to invest in your education or a reasonable mortgage for a house. Savings are important as it shows the lender that you are living within your means.

Tip: Consider these two questions about your PFS. Does your PFS align with your past and current job positions? Does your PFS reflect a history of responsibility when it comes to managing your personal finances?

Conditions: What is the money being used for?

To the lender, conditions represent what the money can be used for and the overall health of the industry. Many things factor into how the lender evaluates the conditions. The premise is that they are gaining a perspective on what the loan will be used for, what will be taking place, the status of the business, as well as the status of the profession and marketplace economy. Lenders like to see positive trends and robust business plans with a thoughtful plan for growth and continuity.

Common reasons for pharmacy financing include: acquiring an existing pharmacy, expansion, renovations, prescription file buys, working capital and refinancing existing loans.

Collateral: What if you don’t pay back the loan?

A lender has to consider the worst-case scenario. What happens if the borrower chooses not to pay back the loaned money?

Collateral acts as a secondary source of repayment. A lender will consider the value of the business’ assets and the personal assets of the guarantors as potential collateral for the loan. Collateral also acts as a psychological motivator, as people tend to get more resourceful when they have something to lose.

Cash flow: How will you pay it back?

To approve the loan, the lender wants to get comfortable with how your pharmacy will be able to repay the loan successfully. With business loans, the repayment ability is coming from the performance of the business being evaluated and the state of their cash flow. You should have sufficient income to support your business 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.

There is a lot to prepare for when looking to obtain a loan. Always remember character, capital, conditions, collateral and cash flow as the pillars of a typical credit analysis. Start reviewing these five areas to help the lender evaluate your business to better understand the risk of making the loan.

Terminology Key

  • Revenue: The amount of money generated from business sales and activity. Also referred to as income, sales, or “the top line.”
  • Cost of Goods Sold (COGS): Cost of the materials to perform the services you deliver, and goods sold. This is the primary variable or direct expense for the business because it varies directly with sales volume.
  • Gross Profit: Money available for the company to meet its overhead and other general expenses.
  • Operating Expenses: General expenses of the business not directly associated with a sale. They are also known as overhead costs or indirect expenses.
  • Net Income: The resultant dollar amount after all other expenses have been subtracted from the gross profit.
  • Net Operating Income (NOI): A simple measure of the company’s cash flow available. Calculated by add-backs to net income.
  • Margin: Ratios created to translate dollar amounts into percentages to express efficiency.
  • Debt Service: Total dollar amount owed for principal and interest payments on a debt.

About the Author:

Live Oak Bank’s mission is to create an unprecedented banking experience for small business owners nationwide, through service and technology. Live Oak Bank is not your traditional bank. With a laser focus on innovation in finance and technology, we bring efficiency and excellence to the lending process. We believe deeply in personal service and focus on taking care of our customers throughout the life of the relationship.

Ali Maoirana