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MAKING NEWS

Tue, 09 June 2009
Essential For A Loan - The Five C Of Credit
Just like you weigh your options thoroughly before applying for a loan, similarly companies that offer finance have priorities. They choose their clients on the basis of the five C’s of credit – character, capacity, capital, conditions and collateral. Here is a short analysis of what these five C’s stand for -

Character

Character refers to the reputation of the client and his business. Both should have a good credit history, which means a loan taken in the past has been successfully paid back. Any failure in repaying a previous loan puts a question mark over the client’s integrity and lenders usually avoid such cases. On a more personal level, character also means full knowledge about the client’s education, business experience and references.

Capacity

It means your enterprise is capable enough to fully pay back the amount it intends to borrow. That is, the lender intends to confirm that you are asking for an amount you can easily pay back. And for this all your previous financial reports are taken into account - your cash inflow and outflow, payment records, other credit relations and current financial standing.

Capital

As is understood, it refers to the amount of money that you have invested in your venture. If it is a big sum then it means that not only are you an economically strong party but also have full confidence in your future business plans. And such positive assurance encourages the lender to pump in his money too.

Conditions

It includes everything that is related to the procedure of issuing loans. In other words, things such as what is the current standing of your business in the market, how much money you need and for what purpose (expansion, for buying raw material, machinery, equipment) and when and how you intend to pay back the whole amount. Before finally saying yes, lenders also consider the volatile market and your response to it, your competitors, customer base etc.

Collateral

This is the most interesting part of a financial agreement from a creditor’s point of view. Collateral means the security you provide the creditors against the money that is borrowed. It gives a certain protection to the lender for his money. So that in case the borrower fails to pay back the whole or even a partial amount, the lender can compensate for it by taking over the security. Now here the security refers to any asset of substantial value like land, building, property, fixed deposits, inventory etc.

If you fulfill the lender’s requirements of five C’s of credit then getting a loan would be cake walk for you.

Source: www.tiddee.com

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