THE FIVE C’S OF CREDIT

Have you heard about the five C’s of credit, and you don’t know what it means? The five C’s are the loan evaluation criteria used by financial institutions to assess loan requests.

The five C’s are as follows:

Character

During character evaluation, money lending firms focus on the stability of your financial position, transaction history that shows your creditworthiness, that is, if you have loan arrears in other accounts or traces of payment inconsistency, and your employment status. This evaluation is carried out by going through your credit record, registration credentials, and performance documents.

Collateral

This is an asset owned by the loaner that money lenders collect as a form of protection in case the loaner is unable to repay the loan in due time. Guarantors are used as an alternative to this. Collateral security may consist of vehicle logbooks, land title deeds, business inventory, savings account balances, and unpaid invoices.

Capital

This is the value of the loaner’s asset minus the value of the loaner’s liability. It is also a form of down payment loaners use to show commitment to their lenders when acquiring a loan for a property.

Cash flow/ capacity

Loaners check your transaction history to compare your debt-to-income ratio to know if it’s good enough.

Conditions

This considers the impact of external forces like market competition, expected returns, loan purpose, and current business loan trends on one’s ability to repay the loan.

Challenges of lending

  1. Assumptions are sometimes made during the evaluation.
  2. Entrepreneurs still default despite been risk-takers.
  3. Manipulation of financial records by loaners to deceive money lenders.

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