CS of Credit: (1) Capacity

¶ … CS of CREDIT: (1) CAPACITY (2) CAPITAL) (3) COLLATERAL (4) CHARACTER (5) CONDITIONS.

OF the "FIVE Cs" WHICH DO YOU SUPPOSE IS the MOST IMPORTANT to LENDERS? PLEASE PROVIDE YOUR REASONING for YOUR SELECTION of WHICH of the "FIVE Cs" IS TYPICALLY MOST IMPORTANT to THOSE THAT LEND MONEY to ENTREPRENEURS? WHAT IS YOUR REASON for YOUR SELECTION of WHICH of the "Cs" IS MOST IMPORTANT to LENDERS?

While an ideal recipient of credit has ample reserves of all of the five 'Cs,' the most important consideration when lending money to an entrepreneur is if the individual or the entity has the capacity (or ability) to repay the loan. Any prospective lender wants to know if he or she will get his or her money back! To evaluate the entrepreneur's capacity for repayment "the lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships - personal or commercial- is considered an indicator of future payment performance. Potential lenders also will want to know about other possible sources of repayment," or to what other lending agencies or individuals the entrepreneur owes money. ("The Five C's of Credit Analysis," MBDA, 2004).

Capital is the money the entrepreneur personally has invested in the business and is an indication of how much he or she has at risk should the business fail. But even if not much is personally at risk, if the individual has the capacity to repay the loan, the lender may take a chance. Having collateral is even more important than capital, as it enables the lender to get back at least some or the entire loan her or she has made. However, going through the legal process of getting the money through forcing the entrepreneur to cash in on that collateral is more difficult than simply extracting payment -- thus an entrepreneur having a large capacity to repay is even more ideal. Market conditions are somewhat important, as having a high interest rate can make lending more attractive, and a strong economy can enable the business to prosper and thus increase the chance that the lender will be repaid. An entrepreneur with good character is important, so that the individual will make a good faith effort to prosper as a businessperson and repay the debt. However, favorable conditions and character will mean little if the individual has a troubled payment history, and little reserves to repay the loan. Most enterprises fail, regardless of favorable market conditions and the good character of the entrepreneur.