Question

How important is the 5C's of credit from the debtor and creditor point of view?

Answer 1

5cs of credit is a system that lenders used to evaluate borrowers creditworthiness and ability to pay loan and before making a decision they would be looking at 5cs in order to judge business creditworthiness.

These 5cs are as follows-

A. Character- Character will mean that it is the business reputation and trustworthiness and it is also the credit history which is related to the borrower and how faithful the borrower have been paying off its debt.

Character would be most important thing because only those discipline business are likely to make their repayment on time from the perspective of the lender.

From the borrowers perspective, they need to have a better character and better personal qualities along with credit report and credit scores.

B. Capacity- it is the ability of the business to pay back the loan and it is also called cash flow capacity because it is directly related to how much cash the borrower can generate for repayment of the loan.

capacity of the borrower will be important because it will reflect the ability of the borrower and cash flows and bank statements which will be helpful in paying down the debt fast and having a higher repayment ability.

From the borrowers perspective, they will need to have a better capcity because it will help them in paying their loan through generation of uniform cash flows.

C. Capital-it refers to how much money the business partners are invested in to the company and from lenders perspective, the more money the borrower have invested in the business the less likely that the borrower bill default on the loan.

so from a borrower perspective the owner need to invest a large amount of money in order to borrow because lenders primarily look at the amount of owner's capital invested.

D. Collateral-collateral is assets that offered as insurance against the loan and, if the borrower defaulting on the loan lender will seize the collateral in order to make up for their losses.

From the lenders perspective, the more collateral is preferred because it will help them in securing their loans and the borrowers could not be liking more collateral to keep because it can hamper their overall operations.

E. Conditions-conditions are all such prevalent requirements of the loan and requirement of the economy as well.

These are combination of interest rate and principal and market factors like inflation as well.

Lenders carefully considers how the borrower is going to use the capital and borrower should always be looking to efficiently using the capital in order to repay the loan