Credit Analysis: The C's of Credit

When you go see a loan officer to get a personal or business loan, what do you suppose they are evaluating you on? You may think it's just your credit history from the Bureau, but in actuality credit analysis is a very in-depth process.

It's a process that begins with what we in the financial industry call the "C's of Credit." The C's of Credit are the standard guidelines, asked in various forms of question from a lender to a borrower during a meeting of loan consultation.

Character, capacity, cash flow, capital, conditions, collateral, and control make up the C's of Credit.

A loan officer will need to establish the character of the borrower. How trust worthy are they? What are they like as a person? Do they seem to hold integrity about them? Would they hold fast to their responsibility to repay the loan? All of these are questions asked regarding the 'character' of a borrower.

Next, the lender will a look at the capacity (who can be held responsible) of the borrower. Is this person seeking a loan even eligible to request one for their business? Can they be held responsible in the event of default or do they have an eligible guarantor if they are unable to meet their obligations?

Cash flow, one of the most important C's of Credit. Lenders ask questions about cash flow to determine if the borrower will have sufficient cash in the future to repay their debt. All debt is paid back in cash. If a company does not have sufficient cash flow for whatever reason, they will be unable to meet their obligations to the financial institution from which they borrowed. Assessing the company or individuals' asset conversion cycle and earnings can be a good estimate to their ability to generate cash flow.

Capital is also important. Asking questions about the amount of equity a company or individual has in important to understanding their capacity to take a 'hit' in whatever market they are in when it undergoes hard times. If a company has sufficient working capital they will be able to continue to meet their debt obligations even during a period of poor performance.