Five Cs of Credit

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Definition: Five Cs of Credit

The 5 C’s of credit are the five parameters to determine the credit worthiness of borrowers. The lenders evaluate the borrowers on these parameters before deciding whether to lend money.

Character – This refers to the intergrity and the history of the firm to honour its debt commitments
Capacity – This refers to the current ability of the firm to repay the loan. It means the stability of the cash flows
Capital – This is the net worth of the company
Collateral – The assets that can be liquidated to repay the lenders in case the commitments are not honored by the firm
Conditions – The conditions of the economy and the country

 

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