The 5 C's of credit include
- collateral and capacity
- character and conditions
Option I and IV
<u>Explanation:</u>
The five C's, or characteristics, of credit are as follows,
- capacity
- character
- capital
- collateral
- 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.
