5cs of Credit

2510 Words Sep 27th, 2013 11 Pages
5C’s of CREDITS www.investorwords.com The five key elements a borrower should have to obtain credit: character (integrity), capacity (sufficient cash flow to service the obligation), capital (net worth), collateral (assets to secure the debt), and conditions (of the borrower and the overall economy).

Five C 's of Credit (5 C 's of Banking) www.wikicfo.com¶ 1. Cash Flow 2. Collateral 3. Capital 4. Character 5. Conditions

The “5 C’s of credit” or "5C 's of banking" are a common reference to the major elements of a banker’s analysis when considering a request for a loan. Namely, these are Cash Flow, Collateral, Capital, Character and Conditions. This article will provide an in-depth description of each of the
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Other asset classes such as goodwill, prepaid amounts, investments, etc. will not be considered by the banker as collateral since in a liquidation scenario, they would not fetch any meaningful amounts. In the case of accounts receivable, the debtor (your company’s customer to whom a good was sold or service rendered) is legally required to pay their bill with the company, and in a liquidation scenario the bank will collect the accounts receivable and use those amounts to pay down the loan. In the case of inventory, equipment and real estate, the bank can sell these assets to someone else and use the proceeds to pay down the loan.

Secondly, the bank will discount or “margin” the value of the collateral based on historical liquidation values. For example, bank’s will generally apply margin rates of 80% against accounts receivable, 50% against inventory, 80% against equipment and 75% against real estate. These advance rates are not arbitrary. These are the amounts that in the bank’s historical experience they have realized in a liquidation scenario against the respective asset class. While you might think that your accounts receivable would collect 100% on the dollar, in actuality the amounts have been historically closer to 80% because in liquidation scenarios, account debtors will come up with reasons why they don’t owe

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