The Five C's of Credit are:
- Character: This defines the intention of the borrower. The
borrower may have the money to pay but if he doesn't have the
intention to payback then the character of the borrower is said to
be bad.
- Capacity: This defines the cash in hand of the borrower to meet
the debt obligations. A borrower may have the intention to payback
the debt, but there may be no money to pay. It may also happen that
a borrower may not have the intention to payback but may have the
money to payback debt. So, it is important that the character is
good and the borrower also has the capacity to payback.
- Capital: This is the equity of the business owners. More the
amount of money invested in the business by the owners, higher the
confidence of the lenders in borrowers.
- Conditions: This is related to the business condition of the
company. If the conditions support the growth of the business, then
the ability of the borrower to repay debt increases.
- Collateral: This is the asset pledged to secure the loan. In
case the borrower doesn't generate sufficient cash flow to payback
debt, then the collateral asset is liquidated to make good of the
loan.
All the five C's are to be analyzed by the lender before making
a loan.