The 5 C’s of Credit and Getting a Loan
As accountants, you should understand how banks view financial statements when assessing a business’ creditworthiness. In that vein, this article provides guidance on the importance of understanding the 5 Cs of credit: Character, Capacity, Collateral, Capital, and Conditions. Character, assessed through FICO scores, reflects credit history, with lower scores suggesting eligibility for SBA financing. Capacity evaluates the business’s ability to repay the loan, focusing on the debt coverage ratio to predict available cash flow. Collateral may be needed for larger loans, often utilizing accounts receivable, inventory, and the business owner’s personal assets. Capital examines the borrower’s equity in the business, essential for proving commitment. Finally, Conditions focus on the business environment, preferring ventures in growing markets with diversified clientele. Learn more by delving into this article.