Magazine article Business Credit

Who Is the Customer? Revisiting the Five Cs of Credit

Magazine article Business Credit

Who Is the Customer? Revisiting the Five Cs of Credit

Article excerpt

It's no surprise that credit investigation procedures work best when there is an established policy in place to investigate new customers and to monitor existing ones. By making routine the steps taken to investigate a new or existing customer, a credit analyst can determine the degree of credit risk and the desirability of extending credit terms to a particular business. The routine nature of the information-gathering "function" minimizes the possibility of oversight in the investigation "process" of reaching a credit decision.

Making credit decisions is like a Sudoku puzzle. Many pieces of information revealed during a proper credit investigation must fit into place. A methodical and systematic credit investigation considers several components as previously outlined. Certain information components may be considered, or weighted, more heavily than others depending on a particular creditor policy or industry policy as a whole. The process should be completed each time an investigation is conducted. Each area of investigation offers information that is relevant when it is time to make the credit decision. For example, relying only on financial, trade payment, bank or agency information may leave the credit manager or analyst to wonder if the customer has ever been sued or had liens filed, or if owners have historically managed the business through difficult economies or industry changes. Therefore, it is important to not overlook or diminish the value of public record resources and information about the principals of the business entity itself.

The Five Cs of Credit

Credit analysis is traditionally based on what is known as the Five Cs of Credit: Character, Capacity, Capital, Conditions and Collateral. The Five Cs of Credit provide the credit manager or analyst with a framework for conducting a controlled investigation process and, therefore, deliver a credit evaluation that considers each component of credit risk associated with credit approval.


But are we limited to only the Five Cs listed? Consider the changes in recent years in various industries not to mention the economy at large. Perhaps we should consider other "Cs" of credit like competition, since the credit analysis process can be influenced by terms or conditions the competition is offering in the marketplace. What about computers or more precisely the Internet? Will the customer or applicant be affected? Will the Internet have, or has it had, a positive or negative effect on a business? For example, is the business in an industry in which sales are shifting to the Internet and causing a negative impact on the customer or applicant? Conversely, a customer or an applicant could have little to no "over-the-counter" sales, yet have a thriving Internet trade, shipping products worldwide and leading to a positive result for the business. Perhaps most importantly, the credit professional must exercise the "C" of credit known as common sense; if, on the surface, something doesn't seem right, then more questions should be asked, more information gathered and a harder look taken.

In each case the credit professional must measure the business credit account against every one of the Cs before issuing credit approval or a final recommendation. Sometimes the degree of credit investigation may depend on the customer's or potential customer's size or importance to the credit grantor and/or to the credit grantor company's established policy or procedures; thus, credit policy may require certain levels of credit investigation for different sizes or types of accounts. Therefore, it is possible for one component to outweigh other "C" components.

For the purposes of our discussion here, we will examine each of the traditional Five Cs of credit.


Character refers to the willingness of a debtor to pay its obligations, and imputes a level of ethics, integrity, trustworthiness and quality of management that is provided or available to the business customer (proprietorship, corporation, etc. …

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