The Five C's of Credit: A Guide to Understanding Credit Evaluation.
The origins of the word credit can be linked back to the Latin word "𝒄𝒓𝒆𝒅", which translates into "𝒃𝒆𝒍𝒊𝒆𝒗𝒆 / 𝒕𝒓𝒖𝒔𝒕." When you are dealing with a "𝒄𝒓𝒆𝒅𝒊𝒕 𝒕𝒆𝒂𝒎", the best outcome is gaining their 𝒕𝒓𝒖𝒔𝒕 𝒐𝒓 𝒃𝒆𝒍𝒊𝒆𝒇 that your business can fulfil the financial obligation you have applied for - Getting your application right from the very start is so important - Making an application is about you building 𝒕𝒓𝒖𝒔𝒕.
When it comes to lending money, financial institutions need to assess the creditworthiness of potential borrowers to determine whether they are a reasonable risk. This process is known as credit evaluation, and one of the most widely used models for credit evaluation is the Five C's of Credit.
The Five C's of Credit are Character, Capacity, Capital, Collateral, and Conditions. Let's dive into each one of them in more detail:
𝐂𝐡𝐚𝐫𝐚𝐜𝐭𝐞𝐫 refers to the borrower's reputation and past credit history. Business Loan providers will consider the borrower's previous credit history, payment habits, bank account management and financial standing. A good credit history is a positive indicator of the borrower's character.
𝐂𝐚𝐩𝐚𝐜𝐢𝐭𝐲 refers to the borrower's ability to repay the business loan. Lenders will look at the borrower's income, debts, and other expenses to determine if they can repay the loan on time.
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 refers to the borrower's financial resources and assets. Lenders want to see that the borrower has a solid financial position and support to fall back on in case of any unexpected events, such as a global pandemic.
𝐂𝐨𝐥𝐥𝐚𝐭𝐞𝐫𝐚𝐥 refers to the assets that a borrower can use as security for the loan should there be a requirement. Lenders want to see that the borrower has something to lose if they default on the loan. This provides a layer of comfort that protects the lender should things go south.
𝗖𝗼𝗻𝗱𝗶𝘁𝗶𝗼𝗻𝘀 refer to the economic and market conditions when business loans were drawn down. Lenders need to consider the current economic conditions, interest rates, and overall stability of the market when making a lending decision.
To summarise, the Five C's of Credit provides a comprehensive approach to credit evaluation and helps lenders make informed lending decisions, which is a good thing for you borrowing the money and the lender lending the money. Our job in Simplí Business Finance is helping Irish business owners understand these factors and work towards improving them to increase their chances of getting approved for a loan.
Are you interested in discussing the above in more detail? Please get in touch with the below contact information.
🌐⌨️ - www.simplifinance.ie
📧🖥️ - Hello@simplifinance.ie
☎️🗣️ - 01 541 5447
