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5 C's of Credit

To determine if a business can obtain credit, lenders evaluate the 5 C's: 1) Capacity, including cash flow, payment history, and contingent repayment sources to evaluate ability to repay. 2) Capital, with lenders wanting at least 25% owner investment to motivate business success. 3) Collateral in the form of hard assets that can be sold if the loan is not repaid. 4) Current economic conditions, with favorable conditions improving loan approval chances. 5) Character, a subjective evaluation of the owner's reliability, credit history, education, and experience.

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485 views1 page

5 C's of Credit

To determine if a business can obtain credit, lenders evaluate the 5 C's: 1) Capacity, including cash flow, payment history, and contingent repayment sources to evaluate ability to repay. 2) Capital, with lenders wanting at least 25% owner investment to motivate business success. 3) Collateral in the form of hard assets that can be sold if the loan is not repaid. 4) Current economic conditions, with favorable conditions improving loan approval chances. 5) Character, a subjective evaluation of the owner's reliability, credit history, education, and experience.

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tanveeraddozai1126
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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5 C’s Understanding Credit Analysis

To determine if you will be able to establish business credit, consider each of the
following C's to see how you would look to a potential lender:

 Capacity – This is an evaluation of borrower’s ability to repay the loan. The


lender wants to know how borrower will repay the funds before it will
approve the loan. Capacity is evaluated by several components, including
the following:
o Cash Flow refers to the income a business generates versus the
expenses it takes over a specific time period. For example, if a
company regularly generates $10,000 a month of revenue, and it has
expenses of $8,000 a month, the lender would determine that there is
$2,000 a month in cash flow that could be used to repay the loan.
o Payment history refers to the timelines of the payments that have
been made on previous loans.
o Contingent sources for repayment are additional sources of income
that can be used to repay a loan. These could include personal assets,
savings or checking accounts, and other resources that might be used.
 Capital –Capital is an owner's personal investment in his business which
could be lost if the business fails. Most lenders want to see at least 25% of
capital so that owners are more motivated to make the business a success.
 Collateral – Hard assets like (owner’s home, automobile, heavy machinery,
stocks and bonds) are called the collateral which is the secondary source of
loan repayment. These can be sold if a borrower fails to repay the loan.
When an owner of a small business uses his personal assets as a guarantee
on a business loan, it means that the lender can sell those personal items to
satisfy any outstanding amount that is not repaid.
 Conditions –Economic conditions at the time the loan is requested. For
example if the borrower seeks loan for a specific industry which is in
growth. The lender will grant the loan and if condition is reverse, the
chances for loan approval are negative.
 Character – This is a highly subjective evaluation of a business owner's
personal history. Lenders have to believe that a business owner is a reliable
individual who can be depended on to repay the loan. Background
characteristics such as personal credit history, education, and work
experience are all factors in this business credit analysis.

Tanveer Ahmad MBA (B & F) 3rd Term Session 2008-2010 Gomal University Dera Ismail Khan

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