4'Cs to Enquire Creditworthiness of New Customer

Introduction 

In the Business world Credit plays a significant role. Credit is a system through which a buyer can buy Goods without paying cash immediately. So, It is a kind of Deferred payment (Delayed Payment or Paying in instalment). Since, the great part of business is carried out on Credit Policy, status inquiries become an essential part. These Status Enquiries can be performed by asking Trade References and Bank References from the borrower to inquire Financial Standing and trustworthiness of a person. 

The components of traditional Credit Analysis are known as 4Cs. The four Cs of credit are a common set of principles that banks and lenders consider while assessing the customers for credit applications. The Four Cs of credit is a system used by lenders to measure the creditworthiness of potential borrowers, which incorporate Quantitative as well as Qualitative standards.

1. Character

Though it is called character, this principle has nothing to do with personality. This refers to an applicant’s business acumen, reputation, credit history and track record to repay debt.

A lender will assess the background of the business owner/s and shareholders, and their experience. A few other things that a lender may look at include:

• Your personal and business credit history
• Your tax returns and financial history
• Whether you’ve paid off previous loans
• Moral Conduct and Legal Issues 

2. Capacity

Capacity refers to the ability of a borrower to make timely Interest Payment as well as Principal Payment. Capacity can be measured by analysing applicant’s debt-to-income (DTI) ratio.

The lender will assess the borrower’s ability to repay the debt by reviewing several items including previous bank statements, other loans and understanding the strategy of where you plan on taking your business, and if the business trade is seasonal.

3. Capital

Lenders will look at the borrower’s overall financial position including:

• Assets and Liabilities
• Net Worth (the difference between the asset and the liability of an individual or a company)
• Liquidity (the state of owning things of value that can be exchanged for cash - Examples: Currency Notes and Coins, Foreign Currency, Account Balance, Cheque, Treasury Bills, Certificates of Deposit) 

Capital includes assets such as tangible assets like inventory, infrastructure, equipment, machinery and investments already made into the business.

Up-to-date valuations of your assets, and balance sheets are considered to measure the current value and potential future value of the business.

Condition of Business

Here, the Credit department also should keep a watch on the current business condition of the customer in particular and External Circumstances in general. Evaluate whether the current condition and circumstances are favourable in granting credit.

If the business is already established, previous Profit and Loss Statements will be reviewed. A lender may also consider any trend in the current and previous financial year data. Many start-ups have a lot of expenses in the first year, so the second year of trade may show a better picture.