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What Are The 4 Cs of Credit?


Source: CreditGuru.Com -- www.creditguru.com


Credit investigation could get intricate and dense. The information that is being gathered could be getting strewn and scattered all over the place. The 4 Cs of Credit helps in making the evaluation of credit risk systematic. They provide a framework within which the information could be gathered, segregated and analyzed. It binds the information collected into 4 broad categories namely Character; Capacity; Capital and Conditions. These Cs have been extended to 5 by adding 'Collateral', or extended to 6 by adding 'Competition' to it (Reference: Credit Management and Debt Recovery by Dick Bass, Bobby Rozario). How about 'Computer' being one of the Cs in this day and age?...or mere 'Common Sense'!


"What are the 4 C's of credit? What do they mean? Are there 3, 4, 5 or 6 Cs of Credit?


No matter how many Cs we come up with, the fundamental question that remains to be answered by the framework of our analysis is:

'Will I get paid on time?'

So let's discuss the structure of our credit analysis within the context of the 4 Cs of Credit
Character

JP Morgan, a successful businessman once said that 'I will do business with anyone as long as he/she is honest!'

In analyzing Consumer Credit one would consider the following:


In analyzing Commercial Credit one would consider the following:


Capacity


What does one analyze under this segment?
Is it:


Sometime a business that you are analyzing might not have the required Capacity in kind but the same could be latent and hidden in some other form. For example a start-up business should have a good business blue-print of succeeding namely a good business plan. A contractor might have a good media advertising plan, say an Ad in the local Yellow Pages. All this adds to the capacity of a business to carry on trade and perhaps be successful.

Created on 17-Mar, 2011 by HKCCMA.

Last Edited on 09-Apr, 2011 by HKCCMA.