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4 C’s of Credit: What is the significance of the 4 C’s of Credit?

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Lending money is a trickier business than we regard it to be. Imagine a situation where you have to lend someone money, how would you react to the situation?

If you know the person, you will feel slightly less worried. Why is that? That’s because you are aware of the person’s nature, financial standing, authenticity of the situation etc.

Take this situation on an organizational level. Can an organization lend someone money, just like that? Umm, no, I don’t think so. As Forbes mentioned in one of its articles, it takes money to make money.

Welcome to the 4 C’s of Credit!

4 C’s of Credit

4 C's of Credit

Basically, the 4 C’s of credit are a set of intelligently organized parameters that serve as a helping hand when making pivotal lending decisions. A financial and lending institution needs to determine whether a person’s situation is:

  • authentic enough,
  • previous financial record is normal,
  • there is no criminal record, etc.

Institutions such as banks often tend to say no to a number of businesses when they ask for loans. Why does that happen?

That’s mainly because the business’s credit value is extremely low. To think of it, if a business’s credit value is low, how can you expect it to return your loan to be returned in due duration without any unforeseeable hassles.

People often argue over the fact that the rules get stricter when we compare personal loans with business loans. Well, to be honest, they should! The stakes with business loans are a lot higher than that with personal loans.

Let’s find out more about the 4 C’s of Credit.

Capacity

Firstly, the lender will analyze the capacity of a business. It is considered to be one of the most important criteria as this serves as the baseline of the entire process.

A company’s income structure is proof enough to determine whether the company has the ability to utilize the loan effectively and then return it.

Capital

Then come the cash handling and the cash flow management of a company. The sources of income, the amount of income prove to be the key factors here.

An accurate record of earnings and savings allows the lenders to analyze the business’s current standing. Furthermore, this will help them decide if a company is able to pay the down payment and mortgage payment of the loan.

Collateral

After discussing the capital, the lenders move on to the collateral of the business. In the presence of an independent appraiser, the lenders can determine the total value of the property owned by the business.

This is done to make sure that if the lender has to face the worst possible scenario of not receiving the loan, the property of the business should be substantial enough to make up for the loss.

A formal report created by the appraiser will be presented to the lender to be reviewed and agreed upon.

Credit

Last but definitely not the least, credit is one of the integral criterion for a lender (bank). By taking a look at the formal credit report of a business, the lender decides whether the company is reliable and capable of receiving a loan.

Furthermore, information such as mortgages, installment loans and the balance of the company helps them reach a final decision on allowing or disallowing the loan request of the business.

To Wrap it up

So, I’m sure after this precise yet enough information has been transferred to you, you will be able to understand its significance and why is it important to practice this more often. Do utilize the information when you step into a financial situation to cater to your decision in the best way.

Let me know how did you feel about this article? Was it helpful enough or did it lack some common set of information. Please reach out to me using the comments section below!

Pursuing my passion i.e. Graduation in Computer Science while creating exciting and informative content to satisfy my thirst of writing.

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