Five C’s of Credit Analysis

When you go to a bank, creditor or any other lending institution to get a personal or business loan, what do you suppose they are assessing your application on? You may think it’s just your credit files, but in reality credit analysis is not all about credit check, the “five C’s” are of equal importance.

  • Capacity: It is the most critical factor that assesses your ability to repay the loan. How you intend to repay the loan is the primary concern of lenders. The lenders will take into account the factors like the timing of the repayment, cash flow, and the likelihood of a successful repayment of the loan.
  • Capital: This is another important criterion that most lenders look out for while analyzing a loan application. Capital is the amount of money you have personally invested in the business and is an indication of the available financial resources you have to deal with the debt. Many a time’s credit analysts place more importance on it. Interested creditors, lending institutions and investors expect you to contribute at least 25% from your own assets before asking them to offer you any kind of funds.
  • Collateral: While perusing your loan application the lenders will also consider the additional forms of security that you can provide in case you default. Giving a collateral implies that you pledge an asset you own, such as your home, car or any valuable property, to the lender with the agreement that in case of default, the lender has the absolute power and authority to take hold of your property to make up the loss from the loan default.
  • Character: It is the impression you form on a lender or an investor. The lender will form a subjective opinion on you after a series of talks to gauge your willingness to repay the loan. Your financial history, educational background and experience in business are some of the factors that are considered by the lender.
  • Conditions: It describes the proposed motive of the borrower to apply for the loan. Prospective lenders will consider the purpose of the loan: will the loan be used for working capital, supplementary equipments or inventory? The lending institution will also look at the external conditions that could affect your business.

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