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The C's of Credit The preliminary credit investigation is a fairly standard process. By standardizing the steps taken to investigate a new or existing account and determine its desirability, the credit department minimizes the potential for slow payments and/or bad debt losses involving that customer. The key elements examined in a credit analysis are known as the "C's of Credit:" They are:
Character: Business's
ability to operate successfully and pay when a debt is due; applicant's
ability to generate cash flows. Actual prior business experience with
related operations, particularly when large volume orders, exacting specifications,
or tight delivery schedules are involved, e.g., major business acquisitions
in an attempt to diversify; evidence of having people capable of operating
successfully and paying their bills. Capital Credit applicant's
equity or net worth; signifies the financial strength as a credit risk
and customer's ability to pay its obligations; business that shows increasing
sales, profits, and net worth, and favorable trends of operations. Judge
each case on its own merits, since many factors affect the financial condition
of a business; some lines need a large investment in fixed assets; others
require only a minimum investment in machinery and fixtures. Some lines
need large amounts of ready cash and liquid assets to meet seasonal operating
expenses, while others can rely on regular cash inflow to meet maturing
debts. Conditions
Analysis
of how current and expected general economic situations may affect the
applicant's business; may include past and current political history,
recent economic events and currency issues. Credit managers should analyze
the business cycle of credit applicants and customers as well as their
own. An industry and country in a period of dynamic growth with flexible
and progressive economic provisions increases the likelihood of a satisfactory
credit experience. Collateral Applicant's
access to additional resources (equities or other assets) to use for payment
if the creditor's capacity or character fail; specific assets, such as
receivables or inventories, can be pledged via liens against these assets,
based on international laws that regulate these types of transactions;
other forms of collateral: letters of credit, standby letters of credit
from the applicant's bank, guaranties by the firm or its parent, personal
guarantees from the principals, and pledges of investment holdings such
as stocks or bonds, or other investments; important to determine whether
potential collateral is free and clear and has not already been pledged
to other creditors. The importance of each element will vary from customer to customer, and are not always weighted equally. In every case the credit executive must measure an account under review against all "C's" before making a final decision about:
Reprinted with the permission of Credit Research Foundation. Edited by Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore. |
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