Loans are not provided easily by the banks. Before giving loans the lenders make complete investigation about the person asking for the loan. Banks basically consider the below mentioned Five C’s of credit before giving a loan to any person.
The first C is a character. The character usually includes behavior and past profile of the company as well as the owner demanding loan. For example, before giving a loan, banks may evaluate the address of the person, previous years records of paying debts. It is the impression which a person makes on the lender. The lender will check your profile and background that how trustworthy you are to repay the loan.
The second C is capacity. What’s your capacity to repay is considered as most important by various lenders before giving credit. The bank sees that from where the loan payment will come. Bank wants that loan payment should come from business operating activities. Cash flow position of the business is taken into consideration with the time period for repayment of the loan. Banks are interested in giving loan to those persons or companies who show some growth when compared to previous years and those businesses that are able to retain some profit every year. This is one of the most important aspects of giving credit.
Now come the real fact of money. Banks are interested to know company’s net worth. Net worth is your assets minus your liabilities. In other words, it means what you own minus what you owe. If a person is making a huge investment in business, then banks believe that the person will do anything to make their business successful. So, higher the investment in business higher will be the chances of getting credit from banks.
Before asking for a loan every individual must have a certain amount of collateral. Collateral is the asset of the person demanding for the loan. The collateral is demanded by the banks to keep it as security in case the individual in future do not pay back. In case the business is not in a condition to repay back the loan so there must be certain security for banks. Assets such as vehicle, property, buildings are mostly put by the person as collateral so that if in future he is not able to pay, the bank will earn the cash by the sale of these assets.
Last but not the least comes the fifth C which is a condition. Before giving credit to any person, lender considers various outside sources which may affect business. If a business firm is asking for a loan, the lender will evaluate its market, its competitors to be safe under any circumstances.
The above mentioned Five C’s are taken into consideration by the lender before giving the loan. These must be kept in mind by every lender whether a bank or any financial institution.