Question

What are the 5 C’s of Credit and their purpose.

Answer 1

Credit analysis is usually done to determine the risk associated with making a loan by the lender. . Credit analysis consists “5C"s such as: character, capacity, condition, capital and collateral.

Character: Lenders need to get confidence about the borrower and guarantors integrity,Additionally, borrowers education and industry knowledge and experience required to successfully operate the business, licensing and criminnal record.The lender also does the credit rating of borrowers and guarantors of the loan

Capacity : The lender will always consider about the capability of repaying the loan. The lender also checks whether the business has sufficient cash flow to support its business expenses and debts , he examines the payment history of current loans and expenses as it indicates the borrower’s reliability and capability to make loan payments.
Condition: The lender understands the condition of the business, the industry, and the economy, he will also analyse whether the current conditions of thebusiness will continue, improve or deteriorate,he will be also interested in knowing how the loan proceeds will be used, working capital, additional equipment, etc.
Capital: You will be asked by the lender what personal investment is made by you in the business so that some personal risk is being involved and it also shows the interest of you in the business.
Collateral: Value of the business assets and the personal assets of the guarantors as an another source of repayment will be considered by the lender when the loan is given. Collateral can be given in various forms the type of the collateral needed and the significance of the collateral depends upon the type of loan and also upon the lender.