The C’s of Credit have traditionally been related to 5 key subjects in credit analysis: Character, Capacity, Capital, Conditions, and Collateral. However, should there be only 5 in today’s world? Are there other C’s that should be considered? This discussion will define the traditional C’s plus additional C’s to contemplate.
Character refers to the willingness of a debtor to pay its obligations and involves a level of ethics, integrity, trustworthiness, and quality of management that is related to the business customer. This involves examining the business background along with the officers.
Capacity deals with the capability of a business to operate profitably and its ability to pay trade creditors, banks, employees, and others as those debts become due. An example would be the business customer’s ability to generate positive cash flow.
Capitalis the value of a customer’s business in excess of all liabilities and claims. This is often referred to as its equity or net worth and represents its financial strength. This doesn’t necessarily refer to cash, but to amount of wealth available and/or the possible production of more wealth.
Conditions are the external events and occurrences that may interrupt or otherwise disturb the normal flow of business. COVID-19 would be an example of a unique condition currently affecting the business customer.
Collateral is the assets that can be pledged as security for the satisfaction of a debt. This doesn’t just include available property. The use of security agreements and/or UCC fillings also are forms of collateral. Legal instruments such as liens and judgments are also examples.
These traditional C’s have been the primary factors for credit analysis for a long time. There are additional C’s that should be included for credit analysis in today’s economy: competition and communication.
The credit analysis process can be heavily influenced by the terms and conditions that are being offered in the marketplace. This factor could affect the value and/or weight of one of the more traditional C’s if that said component is not as positive or limited information is available in a credit analysis.
Today’s credit department needs to be able to communicate fully and clearly with all customers (internal and external). Understanding credit analysis and policy will improve the customers knowledge. Through communication tools such as (ranked in importance): in-person meetings, phone conversations, emails, and letters, customers can be better prepared to work with a credit policy if they understand it. The credit department’s communications with different levels of management within a customer enhances that relationship and mutual understanding.
Written by: Eric Van Driel, director of corporate credit