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The 5 Cs of Credit - Adam Wong A financial institution lends money to its customer so as to earn an adequate return on the loans extended with the expectation that the loan will be fully repaid. Before a financial institution lends money it must therefore reach a decision as to the creditworthiness of the borrower. Creditworthiness is the ability of the borrower or the credit taker to repay the loan when due. The purpose of the credit evaluation process is to : i. identify the risks in the lending proposition; ii. arrive at a conclusion of the borrower's ability to repay the loan; iii. decline the loan or recommend a proper structure for the loan facility that will meet the borrower's needs and protect the lender's position. In evaluating the risk of the lending proposition, there are five general categories of information relating to the borrower which will assist the lender to determine whether or not to grant the loan. These five categories of information are as follows Character - Integrity, willingness to pay. Capacity - Ability to repay. Capital - Owner's investment in the business. Conditions - Economic and business environment. Collateral - Asset pledged in support of a loan. An analysis of the five Cs of the borrower and an evaluation of the borrower's financial statements will provide the basic foundation on which sound credit decisions can be made. |