Question

the fund are raised by issuing debts or equity securities.which is correct under credit evaluation of 5c's principle?

a.capacity

b.collaterals

c.characteristics

d.capital

e.condition

Answer 1

Option d.

There are 5c's to credit evaluation criterion:

Capacity, collateral, characteristics, condition and capital.

Capacity shows the capacity of the organisation to repay the loan amount or the interest of the dividend associated with it.

Collateral means the security which the organisation can provide for raising funds and what is the market value of those securities.

Characteristic shows the credit history of the credit score of an organisation i.e was it able to pay its loan on time or not, is there any default or the loss of money.

Condition means how the organisation intense to use the money what is the purpose of raising the funds.

Capital means amount of the savings or assets that a organisation has which can be used to recover payments in case of default by the organisation.

If the funds are raised by issuing debt or equity securities, all the 5c's will be evaluated but the most important thing which is to be evaluated is the capital of the organisation, because if the organisation fails to make payments, lenders or investors can recover there money from the savings and assets of the organisation. We know that the equity sharesholders are not secured, and they are paid at last after payment is made to debenture holders and preference share holders and other outside liabilities. Therefore, equity sharesholders will make sure that the organisation has sufficient savings or assets to pay them back.