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The 5Cs of Credit

Understanding how financiers assess and monitor credit risk is important to business owners seeking access to funding.

Most financiers focus on the following key characteristics in assessing the credit risk of any customer:

1. Character: customer’s reputation, business track record, integrity.
2. Capacity: ability to service and repay debt; cash v profit; historical v forecast servicing ability.
3. Collateral: security e.g. balance sheet assets, property mortgage(s), personal assets, personalguarantee, etc.
4. Conditions: purpose of loan, financial and reporting covenants, economic conditions.
5. Capital: equity contributed and/or profit reinvested in the business.

Generally speaking, if a customer can meet the particular thresholds and credit policy requirements across the 5Cs then they should represent a good credit risk.

In the current market, financiers remain focussed on the 5Cs but with greater attention on:

• Financial forecasts (“conservatively realistic” based on the business environment);
• Stress/sensitivity testing (based on the real, key variables of the business);
• Closer review of collateral values (particularly property outside of Perth);
• Degree of financial leverage (loan to value ratios); and
• Industry conditions (e.g. residential apartment market softness).

Quadrant Advisory’s services assist with improving banking relationships through:

• Business advisory (not just compliance activities) – those important decisions which can have long term, positive outcomes.
• Financial modelling – regardless of the situation, financial forecasts are an important component of any funding application either as an annual review or seeking increased debt.
• “A customer saved is a customer gained” – by picking up on early warning signs, we help you manage credit risk and assist in difficult times.