Question

In: Economics

Name and describe the “C’s” of credit that Banks and other lenders use in evaluating loan...

Name and describe the “C’s” of credit that Banks and other lenders use in evaluating loan
applicants. Which do you consider the most important and Why?

Solutions

Expert Solution

Character- The creditor has to know the lenders, and the guarantors are trustworthy and have dignity. Additionally, the lender needs to be sure that the applicant has the history, qualifications, knowledge of the industry and experience needed to run the company successfully. Lending institutions can require a certain amount of experience in the management and/or ownership. They would even inquire about your credentials, and whether you have a criminal record or not.

Capacity (Cash flow)- The lender needs to know the business will repay the loan. The business should have enough cash flow to comfortably support its business expenses and debts while also providing sufficient salaries to support personal expenses and debts. Examining the payment history of the current loans and expenses is an indicator of the reliability of the borrower in making loan payments.

Condition- The lender will need to understand the state of the business, market, and economy, which is why working with a lender who understands the WCB market is critical. The lender would want to know whether the company's current circumstances would continue, change or worsen. In addition, the lender may want to know how the proceeds from the loan will be used-working capital, repairs, new equipment, etc.

Capital- Your lender will ask what personal investment you plan to make in the company. Injecting capital not only decreases the likelihood of default, but investing personal assets also means that you're willing to take a personal risk for your business' sake; it shows you've got 'skin in the game."

Collateral- A lender shall recognize the valuation of the assets of the company and the guarantors' personal assets as a secondary source of repayment. Collateral is an important consideration, however its meaning varies depending on the type of loan. A lender should be able to clarify what kinds of collateral the loan needs.


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