The 5 "Cs" of Credit

Banker Resource
July 9, 2013 — 1,540 views  
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You may be in need of credit for several reasons including setting up a new business or to offset the business losses. The understanding of credit analysis basics will help you negotiate loans successfully. Lenders go by a set of criteria in making a decision on offering credit. Typically, credit investigations involve five “Cs” to determine the extent of risk associated with credit decisions.


You may be willing to make payments on the loan, but are you capable of loan repayment? The lender will investigate your business to learn the level of liquidity available with you. If the level of liquidity is sufficient enough to continue to run your business after making the scheduled payment, your loan could be sanctioned, otherwise it will be rejected. Every lender’s credit policy takes your liquidity into account for which they will examine your cash flow on a month-to-month basis. In other words, your business must be profitable.  


Character is a pretty good indicator of your willingness to repay your debts, which every lender will investigate. If you have a past history of default, you will be a suspect. Integrity, honesty, and good reputation are some of the traits that the lender will look for to determine your willingness to repay. The credit policy is pretty scientific in design that minimizes losses to the lender. Therefore, while character is an important aspect of credit function, it’s just one attribute to look for among many. 


Lenders would be taking a huge risk if they offer loans in the absence of collateral. This would be their iron-clad protection against losses, and hence it should be considered a part of credit analysis basics. A borrower with serious intent should be ready to offer collateral or asset in some form in case of default. These collaterals are usually land and buildings that retain their value despite the fluctuating fortunes in the business. The lenders prefer assets that can be realized in cash quickly to recover their investment.


Commitment is an important aspect of credit investigation. There is a reason why the demonstration of commitment by a borrower is important for the lender. It shows them that you are financially and personally committed to your job or business, and indicates the likelihood of your business to remain profitable. They might investigate the hours you work and your lifestyle choices. A high level of commitment to your business reduces the risk entailed by the lender and enhances the likelihood of your loan being approved.


Environment plays a critical role in credit policy. The lender is least inclined to lend money to someone associated with an industry that is not doing well locally and globally. The environmental and economic conditions are beyond your control, but the lender will follow the credit analysis basics to determine the impact of local and global market on your business, the current trend, and other critical environmental factors. This will help them decide the success of your business and the chances of the loan repayment. 

It is evident that a large number of factors determine the success of a credit policy. The task of getting your loan approved is as daunting for you as for the lender. They look into the five “Cs” to determine your creditworthiness.

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