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Review p. 113 of Personal Finance and list the five C’s of credit. Provide a brief description of each.
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. Judgmental factors which (in theory) bankers use to evaluate the quality of a personal or small business loan application. First
four of these are normally under the control of the applicant whereas the fifth is not: (1) Good reputation and track record (character) that indicates a willingness to meet one's obligations, (2) Stable and adequate capital base, (3) Capacity to generate cash flows adequate to cover debt-service, (4) More than adequate valuable assets for pledging as collateral, and (5) economic and other conditions conducive to the applicant's plans. In practice, however, the order of the importance of these factors often is: collateral, capacity, capital, conditions, and character. ]
Expert answered|bubbly_bob|Points 401|
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Asked 11/9/2010 7:08:31 PM
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List the five C’s of credit. Provide a brief description of each.
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Updated 11/10/2010 7:39:14 AM
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Capacity to repay is the most critical of the five factors, it is the primary source of repayment - cash. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships - personal or commercial- is considered an indicator of future payment performance. Potential lenders also will want to know about other possible sources of repayment.

Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Interested lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding.

Collateral, or guarantees, are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can't repay the loan. A guarantee, on the other hand, is just that - someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions describe the intended purpose of the loan. Will the money be used for working capital, additional equipment or inventory? The lender will also consider local economic conditions and the overall climate, both within your industry and in other industries that could affect your business.

Character is the general impression you make on the prospective lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be considered. The quality of your references and the background and experience levels of your employees will also be reviewed.

Added 11/10/2010 7:39:14 AM
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