Five Cs of credit Five characteristics that are used to form a judgment about a customer's creditworthiness: character, capacity, capital,

collateral, and conditions.

Five Cs of Credit Five factors a lender considers when evaluating whether or not to extend credit to a potential borrower. Importantly, the five Cs of credit include both quantitative and qualitative measures. They are: character (or the borrowers' reputation), capacity (a measure of the borrower's ability to repay by comparing his/her debt service to income), capital available, collateral pledged against the loan, and the conditions of the loan (such as the interest rate, monthly payment, and so forth).

Definition of 'Five Cs Of Credit' A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics of the borrower, attempting to gauge the chance of default.

The five Cs of credit are:

-Character -Capacity -Capital -Collateral -Conditions

Investopedia explains 'Five Cs Of Credit' This method of evaluating a borrower incorporates both qualitative and quantitative measures. The first factor is character, which refers to a

borrower's reputation. Capacity measures a borrower's ability to repay a loan by comparing income against recurring debts. The lender will consider any capital the borrower puts toward a potential investment, because a large contribution by the borrower will lessen the chance of default. Collateral, such as property or large assets, helps to secure the loan. Finally, the conditions of the loan, such as the interest rate and amount of principal, will influence the lender's desire to finance the borrower.

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The Five Cs of Credit Analysis The preliminary credit investigation is a fairly standard process. By standardizing the steps taken to investigate a new or existing account and determine its desirability, the credit department minimizes the potential for slow payments and/or bad debt losses involving that customer. The key qualitative and quantitative measures examined in a credit analysis are known as the "C's of Credit" are: Character, Capacity, Capital, Conditions of the times, Collateral

Character:

This involves a customer's willingness to pay obligations; its reliability, integrity, trustworthiness, and quality of management: assess individual's business character based on their success, payment record, and information from current suppliers; use intangibles (family background, employment record, personal credit history) to form a tentative opinion. In other words. is the customer willing to pay its debts on time or does the company tend to stretch payments to suppliers?

Capacity to pay:

Business's ability to operate successfully and pay when a debt is due; applicant's ability to generate cash flows. Actual prior business experience with related operations, particularly when large volume orders, exacting specifications, or tight delivery schedules are involved, e.g., major business acquisitions in an attempt to diversify; evidence of having people capable of operating successfully and paying their bills. One way to evaluate capacity is to determine if the customer generates sufficient cash flow necessary to pay debts as they come due.

Capital:

Credit applicant's equity or net worth; signifies the financial strength as a credit risk and customer's ability to pay its obligations; business that shows increasing sales, profits, and net worth, and favorable trends of operations. Judge each case on its own merits, since many factors affect the financial condition of a business; some lines need a large investment in fixed assets; others require only a minimum investment in machinery and fixtures. Some lines need large amounts of ready cash and liquid assets to meet seasonal operating expenses, while others can rely on regular cash inflow to meet maturing debts.

Conditions:

Analysis of how current and expected general economic situations may affect the applicant's business; may include past and current political history, recent economic events and currency issues. Credit managers should analyze the business cycle of credit applicants and customers as well as their own. An industry and country in a period of dynamic growth with flexible and progressive economic provisions increases the likelihood of a satisfactory credit experience.

Collateral:

Collateral, such as property or other assets, helps to secure payment if those assets are pledged to the creditor. Specific assets, such as accounts receivable or inventories can be pledged to creditors. Other forms of collateral include Letters of credit, Standby letters of credit, Guaranties by the firm or its parent, or Personal guarantees from the principals.

The importance of each element will vary from customer to customer. In every case, the credit professional must evaluate an account under review against all "C's" before making a final decision about: Whether additional information is needed to make a final credit decision; Whether or not open account terms will be extended; What specific terms of sale are appropriate; What credit limit is appropriate;

What if any additional assurances of payment [such as a personal guarantee in the case of a corporation] are required before establishing an account for an applicant.

Credit Risk Management Risk and opportunity go hand in hand, and in every business there must always be a balance between the drive to achieve a specific volume of sales and the credit risk associated with selling on open account terms, or alternatively accepting a customer's check in payment. With every sale, there is some question about the seller's ability to collect the money owed.

Credit risk management should be developed within the context of the goals and objectives of the company as a whole. While your main focus should be on managing and controlling the company's exposure to credit risk, you cannot manage your risk without regard for the company's need to achieve

certain sales targets. Successful credit managers who blend credit risk management into their employers' overall business philosophy will gain the support and trust of senior management by creating policies and procedures that optimize sales, profits, and cash inflows while keeping risk, delinquencies and losses at acceptable levels.

Credit risk can be defined as the risk of financial loss resulting from the failure of the debtor to honor part or all of its obligations to pay creditors' invoices as they come due. The goal of credit management is to optimize the company's sales and profits by keeping both credit risk and payment delinquencies within acceptable limits. Sound credit management involves finding the right balance in the risk/reward relationship between sales and bad-debt losses.

There are a number of ways to manage credit risk. The most common include: Accepting risk, Controlling risk, Avoiding risk, Transferring credit risk.

Avoiding risk can be accomplished by refusing to extend credit to high-risk accounts. However, in most companies this is not a viable option since so many customers could be classified as high risk that refusing to sell to them would reduce sales to unacceptable levels. Controlling risk in volves developing a comprehensive plan to reduce credit risk in the company's accounts base, then implementing that plan, and monitoring the credit department's efforts to carry out the plan. Accepting risk involves a decision to dobusiness with customers identified as high risk. These tend to be companies trying to gain market share, companies with high profit margins, companies with excess inventory, and companies with adequate reserves for the bad debt losses that are almost certain to accompany this policy.

Definition of 'Quantitative Analysis' A business or financial analysis technique that seeks to understand behavior by using complex mathematical and statistical modeling, measurement and research. By assigning a numerical value to variables, quantitative analysts try to replicate reality mathematically.

Quantitative analysis can be done for a number of reasons such as measurement, performance evaluation or valuation of a financial instrument. It can also be used to predict real world events such as changes in a share price.

Investopedia explains 'Quantitative Analysis' In broad terms, quantitative analysis is simply a way of measuring things. Examples of quantitative analysis include everything from simple financial ratios such as earnings per share, to something as complicated as discounted cash flow, or option pricing.

Although quantitative analysis is a powerful tool for evaluating investments, it rarely tells a complete story without the help of its opposite - qualitative analysis. In financial circles, quantitative analysts are affectionately referred to as "quants", "quant jockeys" or "rocket scientists".

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