Reading Material Task 2

The document outlines the 'Five Cs' of credit analysis used by lenders to assess creditworthiness: capacity, capital, collateral, conditions, and character. It emphasizes the importance of a well-documented loan request and a comprehensive business plan, detailing what lenders look for in each of the five categories. Additionally, it advises borrowers to regularly review their credit profiles for accuracy.

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Reading Material Task 2

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Jenyll Quintal

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Adaptive Community for the Continuity of Education and Student Services

National Teachers College

READING MATERIAL 2-C

The Five Cs of Credit Analysis

Whether you’re seeking funding through a Small Business Administration loan

guarantee, a bank, or a local development corporation, prospective lenders will work
hard to try and determine your creditworthiness. A thoroughly documented loan
request, including a comprehensive business plan, will help them better understand you
and your business.

Virtually all lenders rely on some variation of the “five Cs” of credit analysis to
determine whether they’ll fund your business. These are: capacity (your ability to pay
back a loan), capital (your net worth), collateral (assets to secure the debt), conditions
(of the borrower and the economy at large), and character (of you, the borrower).

Understanding the Five Cs

Capacity: Prospective lenders will want to know exactly how you intend to repay
a loan. They’ll consider the cash flow of your business, your proposed schedule of
repayment, and the probability that you will, in fact, successfully repay the loan. Your
payment history on existing credit relationships, personal or commercial, is considered
an indicator of your future payment performance. Prospective lenders will also want to
know about your “backup” sources of repayment.

Capital: This is the money you have personally invested in your business — and
subsequently stand to lose — should your business fail. Prospective lenders like to see
that you’ve used some of your own assets and taken on personal financial risk to
establish your business before you ask them to give you any of their money. They also
want to know how much debt your company can handle. There are numerous financial
benchmarks, including debt and liquidity ratios, that lenders use before advancing
funds to anyone.

Collateral: This is security you can provide the lender. You pledge an asset, such
as your home, to the lender with the agreement that the lender can take it if you can’t
repay the loan. This is different from a guarantee, where someone else signs a document
promising to repay your loan if you can’t. Some lenders may require both.

Conditions: What do you intend to use your loan for? Are you seeking money for
working capital, additional equipment, or inventory? Lenders want to know this. They’ll
also consider the economic climate in your industry — and other industries — all of which
affect the success of your business. If your business is sensitive to economic downturns,
a lender will want reassurance that you’re adept at managing productivity and
expenses.

BAEM3 – Personal Finance 21

School of Business, Second Semester, SY 2021-2022
Adaptive Community for the Continuity of Education and Student Services
National Teachers College

Character: Prospective lenders will want to know that you’re trustworthy enough
to repay your loan. They can never be 100 percent certain, of course, but they can and
will review your educational background and your experience in your industry. The
quality of your references is also critical. Lenders want to put their money with clients
who have the best credentials and references.
Finally, it’s a good idea to review your credit profiles regularly. Contact one of the credit
bureaus to obtain your business credit report and check for any errors or omissions. This
information will be shared with lenders.

https://www.allbusiness.com/the-five-cs-of-credit-analysis