Character refers to the financial history of the borrower. Character can be determined by looking at credit history. Late payments, delinquent accounts, Available credit and Total debt all have a bearing on a person or business’s character. Lenders and investors assess your character by your past performances the way you handle your financial affairs both business and personal. Character for a business includes factors such as size, location, number of years in business, business structure, number of employees, history of principals, liens, lawsuits, stock performance, and comments from references.
Capital assesses whether a company has the financial resources to repay its creditors. It refers to the business’ assets. Capital might include machinery and equipment for a manufacturing company, as well as product inventory. Lenders consider capital, but with hesitation, because if a business folds, they are left with assets that have depreciated.
Capacity refers to the demonstrated ability to repay. It refers to the ability of the business to generate revenues in order to pay back the loan. Since a new business has no record of profits, it is a greater risk when compared to an established business. Capacity also includes the structure of the company's debt, whether secured or unsecured, and the existence of any unused lines of credit. Any defaults must also be identified. A business should also have plans both for good and bad times in the economy. If your product is not competitive then it could reduce the business’ capacity to make payments. Competition definitely influences Capacity.
Lenders also find it practical to look at current economic conditions when deciding to extend credit. They will look at the industry you are in, and how it is affected by those conditions. A slower economy means lenders are more careful in their practices. Conditions consider the external factors surrounding the business under consideration: influences such as market fluctuations, industry growth rate, and political/legislative factors.
To me, of the four C’s the most important is character. The character of the management team, their reputation in the industry and the community are critical. Investors want to stand behind individuals who have impeccable credentials and references. The treatment of employees and customers, your accountability, and your appropriateness in fulfilling your obligations are all part of the character. Your character counts. Your leadership skills in both your business and personal life gives the lender a clue about how likely you are to handle leadership as a business owner. Your character comes into play if there is a business crisis. After all, would you extend credit to some one who has a history of late payments, no payments, and defaults?
Summation
The four Cs of credit are the four primary considerations that will affect a lender’s decision to approve or decline your a loan application.
1. Capacity
- What is your ability to repay the loan?
- Do you have a job or another income source?
- Do you have other debts?
2. Character
- Will you repay the loan?
- Have you used credit before?
- Do you pay your bills on time?
3. Conditions
- What are the current economic conditions and how does your company fit in?
- What are the trends for your industry, and how does your company fit within them?
- Are there any economic or political issues that could negatively impact the growth of your business?
4. Capital
- What are you worth?
- Do you have other assets, such as a savings account, car, or certificate of deposit that could be used to repay the debt?
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