The 5 Cs of credit are useful tools used by credit analysts when assessing the amount of risk that a borrower has, during the credit application process. For any lending institution, minimal risk involved provides the ideal lending arrangement.
It’s key to note that lenders want to protect their assets against any forms of default, which is why it’s important to mitigate risks by using the 5 Cs of credit.
Juan is an applicant interested in how much time actually goes into the way in which his application is analysed.
Within credit analysis, the 5 Cs of credit have been successfully utilised through the years as a way of predicting credit behaviour.
Lenders examine how much money Juan has put into his business before even applying for finance.
Juan must give clarity about what how he will make use of the loan. The lender also considers issues that could have an effect on Juan’s affordability.
This involves an examination of Juan’s character in general. Lenders will do background checks and make other enquiries. This may be useful for forming an opinion.
At this point, credit providers will examine the profits Juan has made from investments. They will work out if these can be used to pay creditors back. If Juan owns a business, its cash flow will be examined, along with how it has paid debts historically.
Borrowing money often means assets must be available as a back-up plan. Juan must be able to provide this surety that what is owing will be paid even if he no longer can, otherwise he lowers his chances of approval.
For credit analysts, using this tool makes it easier to work out whether an applicant should be given a loan or not.