The 5 C’s of Business Credit
Hi, my name is Adam Stewart, Debt Collection Expert and owner of Debt Recoveries Australia.
This week, I am going to talk again about how to prevent bad debt. This will help save you a lot of time and energy down the track.
When extending credit to a new customer, creditors look for certain characteristics. You can also use these characteristics in assessing your potential customer’s credit worthiness.
What are these characteristics? The most common way of assessing someone’s credit worthiness is often referred to as the Five C’s of Business Credit.
The Five C’s of Business Credit is a common method used by lenders to determine the credit worthiness of potential borrowers or customers. The system weighs five characteristics of the customer or borrower, attempting to gauge the chance of default.
The Five C’s of Business Credit are:
1. Character – this refers to a borrower’s reputation
2. Capacity – this measures a borrower’s ability to repay you, by comparing income against recurring debts
3. Capital – you should consider any capital your borrower or customer puts toward a potential investment, because a large contribution by them will lessen the chance of default
4. Collateral – such as property or large assets, helps to secure the loan
5. Conditions – conditions of the loan or line of credit, such as the interest rate, amount of actual credit and/or amount of principal, will influence your desire to finance your borrower or customer
This method of evaluating a potential customer incorporates both qualitative and quantitative measures.
Once you have gone through the Five C’s of Business Credit, it will hopefully answer some pretty important questions, such as:
• Does the customer’s history demonstrate honouring their obligations?
• Are they willing to communicate openly about their financial situation–which includes providing audited and updated financial information?
• Do they have referrals or people that can vouch for them?
• Will you take them on as a customer?
If you adhere to the Five C’s of Business Credit, you will typically have lower bad-debt problems.
If you still end up with bad debts, you know what to do. Email me at firstname.lastname@example.org or call 1300 799 511. You may also Skype me at debtrecoveries.