Question

Explain the 5 c's of credit?

Answer 1

5 c's of credit are the features of borrower which lender should analyze before lending loan to borrower. They are discussed below

1. Character: Character means the reputation of the borrower. In this the lender analysis whether the borrower has good reputation and good past record of repayment of earlier loan taken. The borrower should be credible and trustworthy so that lender can lend loan

2. Capacity: In this case the lender analysis whether borrower has sufficient capacity to repay its loan. The financial statement of borrower are analyze to determine whether borrower is generating sufficient cash flow to repay the loan back.

3. Capital: In this case the capital contributed by owner is determined. The higher the own capital contributed by owner, the better is the financial condition of company.

4. Conditions: In this case lender would analyze the current and past condition of business of borrower. It would analyze whether the business is growing in terms of market share and sales revenue and also analyze the future prospect of business line.

5. Collateral: In this case the collateral which is given as security is analyze. Thus, lender would check whether the collateral given is sufficient to repay the loan and the quality of collateral is determine.

All the five C's are necessary to be analyzed before any lending is made to borrower.