The 5 C’s of credit

When a creditor lends out its money it has to evaluate the creditworthiness of potential borrowers. Creditors would be well advised to utilise a set of guidelines such as the 5 C’s of credit. 

Character  

This refers to the borrower’s integrity and willingness to repay the financial obligation, as in their credit history. Has the borrower declared bankruptcy in the past? Has the borrower had a failed enterprise in the past? Has the borrower failed to meet family obligations? A “yes” answer to any of these questions could place the borrower’s character in doubt.  

Capacity 

It measures a borrower’s ability to repay a loan by comparing income against recurring debts and assessing the borrower’s debt-to-income (DTI) ratio. In addition to examining income, lenders look at the length of time an applicant has been at their job and job stability. 

Capital  

This is the borrower’s financial net worth. A significantly positive net worth has the potential to offset insufficient cash flows, because financiers perceive the borrower still has more than adequate means to repay the loan.  

Collateral  

This refers to any property owned by the borrower that can be pledged for security. If the property has been previously pledged against another loan, financiers would probably not consider it available to be pledged again until the previous loan has been paid off.  

Conditions 

These refer to economic, industrial and company-specific prospects and events that may occur during the period of the loan that could have a significant effect on your company. These might include rising raw material prices, an employee strike, increasing interest rates, etc.