To determine if a business can obtain credit, lenders evaluate the 5 C's:
1) Capacity, including cash flow, payment history, and contingent repayment sources to evaluate ability to repay.
2) Capital, with lenders wanting at least 25% owner investment to motivate business success.
3) Collateral in the form of hard assets that can be sold if the loan is not repaid.
4) Current economic conditions, with favorable conditions improving loan approval chances.
5) Character, a subjective evaluation of the owner's reliability, credit history, education, and experience.
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To determine if a business can obtain credit, lenders evaluate the 5 C's:
1) Capacity, including cash flow, payment history, and contingent repayment sources to evaluate ability to repay.
2) Capital, with lenders wanting at least 25% owner investment to motivate business success.
3) Collateral in the form of hard assets that can be sold if the loan is not repaid.
4) Current economic conditions, with favorable conditions improving loan approval chances.
5) Character, a subjective evaluation of the owner's reliability, credit history, education, and experience.
To determine if a business can obtain credit, lenders evaluate the 5 C's:
1) Capacity, including cash flow, payment history, and contingent repayment sources to evaluate ability to repay.
2) Capital, with lenders wanting at least 25% owner investment to motivate business success.
3) Collateral in the form of hard assets that can be sold if the loan is not repaid.
4) Current economic conditions, with favorable conditions improving loan approval chances.
5) Character, a subjective evaluation of the owner's reliability, credit history, education, and experience.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online from Scribd
To determine if a business can obtain credit, lenders evaluate the 5 C's:
1) Capacity, including cash flow, payment history, and contingent repayment sources to evaluate ability to repay.
2) Capital, with lenders wanting at least 25% owner investment to motivate business success.
3) Collateral in the form of hard assets that can be sold if the loan is not repaid.
4) Current economic conditions, with favorable conditions improving loan approval chances.
5) Character, a subjective evaluation of the owner's reliability, credit history, education, and experience.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online from Scribd
Download as docx, pdf, or txt
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5 C’s Understanding Credit Analysis
To determine if you will be able to establish business credit, consider each of the following C's to see how you would look to a potential lender:
Capacity – This is an evaluation of borrower’s ability to repay the loan. The
lender wants to know how borrower will repay the funds before it will approve the loan. Capacity is evaluated by several components, including the following: o Cash Flow refers to the income a business generates versus the expenses it takes over a specific time period. For example, if a company regularly generates $10,000 a month of revenue, and it has expenses of $8,000 a month, the lender would determine that there is $2,000 a month in cash flow that could be used to repay the loan. o Payment history refers to the timelines of the payments that have been made on previous loans. o Contingent sources for repayment are additional sources of income that can be used to repay a loan. These could include personal assets, savings or checking accounts, and other resources that might be used. Capital –Capital is an owner's personal investment in his business which could be lost if the business fails. Most lenders want to see at least 25% of capital so that owners are more motivated to make the business a success. Collateral – Hard assets like (owner’s home, automobile, heavy machinery, stocks and bonds) are called the collateral which is the secondary source of loan repayment. These can be sold if a borrower fails to repay the loan. When an owner of a small business uses his personal assets as a guarantee on a business loan, it means that the lender can sell those personal items to satisfy any outstanding amount that is not repaid. Conditions –Economic conditions at the time the loan is requested. For example if the borrower seeks loan for a specific industry which is in growth. The lender will grant the loan and if condition is reverse, the chances for loan approval are negative. Character – This is a highly subjective evaluation of a business owner's personal history. Lenders have to believe that a business owner is a reliable individual who can be depended on to repay the loan. Background characteristics such as personal credit history, education, and work experience are all factors in this business credit analysis.
Tanveer Ahmad MBA (B & F) 3rd Term Session 2008-2010 Gomal University Dera Ismail Khan
