Question

The 5 C's of credit include: I. Collateral and Capacity II. Conditions, Capital and Consideration III. Collateral and Credit Score IV. Character and Conditions V. Consistency and Capacity

Answer 1

The 5 C's of credit include

• collateral and capacity
• character and conditions

Option I and IV

Explanation:

The five C's, or characteristics, of credit are as follows,

1. capacity
2. character
3. capital
4. collateral
5. conditions

These are the framework used by most of the traditional lenders to estimate the potential (creditworthiness) of small-business borrowers.

Capacity: The ability of the borrower to repay the loan. It is evaluated from the benchmarks, financial metrics, borrowing and repayment history, credit score.

Character: The general credibility, trustworthiness and personality of the borrower from the lender's perspective. It is estimated from the credit history, work experience, references, credentials, reputation or interaction with lenders.

Capital: This is the total sum invested in the business by the owner or the partnership management.

Collateral: The assets that are used to secure and guarantee the loan. It is calculated from the hard assets like real estate or equipment; working capital, namely accounts receivable and inventory.

Conditions: The status of the borrowers business (growing or faltering). It evaluates the industry and economic trends that would affect the business and repayment of the loan.