Question

1) A company might decide to delay payments. Explain in detail because the companies can do this?

2) Explain what each of the 5 C's means. It can be a brief explanation for each. 5c of credit

Answer 1

1. Company may decide to delay payments incase where the vendors have provided them with some credit period. There are very common payment terms in business which provide a small percentage of discounts incase payments are made within a short credit period provided by the vendor, post that the discount is not allowed. An example of this payment term could be - 2 % 10, Net 30, this means that incase the company pays within 10 days it will get 2% discount , after 10 days the company will not get discount, but it has to pay within 30 days. There fore, it would be a prudent practice for the cash management of the company to avail the entire credit period of 10 days and pay at the end of 10 days to avail discount, incase the payment gets delayed it can still pay within 30 days hence it can avail the entire 30 days credit period.
2. The 5 C's of Credit -
   1. Character - This shows the character i.e. the track record or credit history of the borrower. This can be estimated through credit appraisal reports.
   2. Capacity - This shows the capacity i.e. the ability of the borrower to repay the credit borrowed. This can be estimated through credit ratios and income statements.
   3. Collateral - This means the security given by the borrower to lender. Incase of any default by the borrower, the lender can forfeit the collateral to recovery his money.
   4. Capital - This means the capital invested by the borrower in the project. This can be in the form of share capital.
   5. Conditions - This refers to the conditions prevailing in the economic environment, like interest rates, exchange rates, and the purpose of the loan.