The 5 C’s of Credit: What Lenders Really Want You to Know
When speaking about credit, the first thought that comes to a person's mind is generally credit cards. It is well-known that that a credit card institution will perform a credit check. However, there are other reasons for credit checks to be run on an organization or for an individual. Applying for a loan, from a car loan to a mortgage loan to a business loan, requires a financial profile of the requestor.
Application of the five C’s of credit lends itself to be sure that an organization’s credit customers will pay, without being pressured, within the stated credit terms. Briefly, we will discuss some standards used in the credit selection process. These standards help and allow lending institutions to determine and decide who should receive credit....and how much.
The five C’s are character, capacity, capital, collateral, and conditions.
Character involves the applicant’s record of meeting past obligations. In other words, your credit history can be used as a “measuring stick” to determine whether or not you will pay on-time without the need to be contacted via means of phone calls, emails, mailed letters, etc.
Capacity which is your ability to repay the credit you are requesting or have requested. A look at your financial statements is the starting point for most lenders as they seek to understand your available cash flows that can be used to repay the debt obligations.
Capital references your debt relative to equity. You will want to, at minimum, attempt to have lower total debt than your total equity.
Collateral is the amount of assets that you have available for use in obtaining and securing the credit. The more assets, the better the chances you are to obtaining the credit because the lending firm has a better chance at recovering their funds if you default.
Conditions refers to the current general and industry-specific economic conditions and any unique conditions surrounding a specific transaction.
The five C's are, to some, common knowledge. For others, it is exposure to a technique that is designed to establish some type of financial profile for the requestor of credit. While having established can facilitate growth and wealth, it can also have the reverse effect. If credit is approved, the expectation is that the borrower will pay on time without the need to have matters escalated. Defaulting on a loan can lower your chances of receiving credit in the future, lower your credit score, place the requestor in legal situation by being sued, among other things.
Careful planning and use of credit can be the difference between wealth and bankruptcy. So, having a basic understanding after being exposed to these standards is a basis for making credit work for your organization....or yourself!
References
Smart, C. J. (2019). Principles of Managerial Finance. 15th Edition. New York City: Pearson Education.
Meet Nikia Smith, the Director of Project Management Office (PMO), driving success at Business and Wealth Generations. With over a decade of advisory expertise, Nikia orchestrates strategy and operations, spearheading growth and innovation. Beyond his professional endeavors, Nikia actively participates in his community, having served on the Board of Directors at the Project Management Institute Florida Suncoast Chapter in different roles for several years. Recognized for his contributions, he received the PMI Florida Suncoast Chapter Award in 2018 for significantly boosting membership and retention and was also selected to attend the 2019 PMI North America Leadership Institute Meeting in Philadelphia. Nikia holds a bachelor’s degree in management and organizational leadership with a focus on Project Management, alongside several business certificates from St. Petersburg College. He is also certified in CAPM and PMP by the prestigious Project Management Institute. For collaboration opportunities, reach out to Nikia at info@thebusinesswg.com.
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