The 5 C's of Credit

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Information on the 5 C's of credit and why they are important: character, capacity, capital, conditions, and collateral.

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The 5 C's of Credit

  1. 1. The 5 “ C’ s” of Credit <ul><li>CMA Webinar Series </li></ul><ul><li>9 AM - 10 AM </li></ul><ul><li>Tuesday, June 16, 2009 </li></ul><ul><li>Presented by: </li></ul><ul><li>Paul Beretz </li></ul><ul><li>Pacific Business Solutions, a Q2C Partner </li></ul><ul><li>[email_address] </li></ul>
  2. 2. Risk Assessment <ul><li>Within the area of assessing risk, the credit professional faces many challenges: </li></ul><ul><li>Gathering and determining accuracy of facts </li></ul><ul><li>Evaluating and quantifying risk factors </li></ul><ul><li>Meeting product and sales expectations </li></ul><ul><li>Satisfying company financial objectives </li></ul>
  3. 3. The Credit Transaction <ul><li>Risk of non-payment </li></ul><ul><li>Timing </li></ul><ul><li>Security </li></ul><ul><li>Extra costs </li></ul><ul><li>Legal aspects </li></ul><ul><li>Economic Influences </li></ul>
  4. 4. The First “ C ” - Character <ul><li>Willingness to pay; morality; </li></ul><ul><li>Background; experience; abilities </li></ul><ul><li>Ownership: from hidden to confusing to “owner not available” </li></ul><ul><li>Distribution of functions; outside interests </li></ul><ul><li>Legal form of business </li></ul><ul><li>Favorable payment records </li></ul><ul><li>Bankruptcies; litigation; settlements </li></ul><ul><li>Examples </li></ul>
  5. 5. The Second “ C ” - Capacity <ul><li>Ability to pay bills when due </li></ul><ul><li>Cash flow awareness - past, present and future </li></ul><ul><li>How current assets are managed and utilized </li></ul><ul><li>Examples </li></ul>
  6. 6. The Third “ C ” - Capital <ul><li>Equity or net worth </li></ul><ul><li>Trend of business </li></ul><ul><li>Investment and utilization of fixed assets </li></ul><ul><li>Examples </li></ul>
  7. 7. The Fourth “ C ” - Conditions <ul><li>Industry </li></ul><ul><li>Products </li></ul><ul><li>Terms - selling and buying </li></ul><ul><li>Delivery </li></ul><ul><li>Seasonal </li></ul><ul><li>Changes in operations </li></ul><ul><li>Rent or own </li></ul><ul><li>Location(s) of business </li></ul><ul><li>Examples </li></ul>
  8. 8. The Fifth “ C ” - Collateral <ul><li>“ Hard” assets </li></ul><ul><li>Guarantees - types and applications </li></ul><ul><li>Risk mitigation options </li></ul><ul><li>Examples </li></ul>
  9. 9. Bonus C’ s! The International “ C’ s” <ul><li>“ Why do I need to be concerned about international “ C ’s” if my company only sells in the US?” </li></ul><ul><li>The 3 “ C’ s” of international risk management </li></ul><ul><ul><ul><li>C ountry </li></ul></ul></ul><ul><ul><ul><li>C urrency </li></ul></ul></ul><ul><ul><ul><li>C ultural </li></ul></ul></ul><ul><li>Examples </li></ul>
  10. 10. “ When Do I Use the “ C ’s?” <ul><li>“ It was a dark and rainy Friday….” </li></ul><ul><li>Non-financial statement analysis </li></ul><ul><li>New customer </li></ul><ul><li>New personnel in the credit function </li></ul><ul><li>As a check-list </li></ul><ul><li>When an event occurs that could impact risk assessment with an existing customer </li></ul>
  11. 11. Illusions of Credit Risk Management
  12. 12. Illusions of Credit Risk Management <ul><li>“ I have a credit policy” </li></ul><ul><li>“ For credit evaluations, I’ll get software” </li></ul><ul><li>“ My credit application always works for me!” </li></ul><ul><li>“ We hold orders when the account is past due” </li></ul><ul><li>“ I have credit insurance; no risks, no losses!” </li></ul>
  13. 13. Risk Management: Best Practices <ul><li>Education: choices; analytics; analysis; training </li></ul><ul><li>Networking </li></ul><ul><li>Attending Sales/Business meetings </li></ul><ul><li>Open to new ideas </li></ul>
  14. 14. Risk Management - Best Practices (cont) <ul><li>Don’t blame technology! </li></ul><ul><li>One-size does not work for all (think of the 5 “ C ’s”) </li></ul><ul><li>Communicate and delegate </li></ul><ul><li>Take the initiative! </li></ul>
  15. 15. Questions?

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