Assessing the credit-worthiness

Notes

Assessing the credit-worthiness

When assessing the creditworthiness of (potential) clients, companies can use the 5 C’s approach:

  1. Character:

    Focuses on the reputation of the principals/decision makers at a company; credit checking agencies and bank references assist to this end

  2. Capacity:

    Examines the company’s cash flow generation in the context of management’s ability to perform competently and reliably in meeting their obligations. Financial statement analysis is a major part of the exercise here

  3. Capital:

    Identifies and assesses the financial “staying power” and resources of the business

  4. Collateral:

    Assesses what security the company is willing to provide in support of the intended transaction.

  5. Conditions:

    This is a general review of the economic environment to appreciate to what extent a customer may be affected by a decline in general business conditions.

Notes