The Four C's of Business Credit

A business’s creditworthiness is ultimately determined by what are known as the “four Cs of credit” – character, capacity, capital, and conditions – most of which can be found explicitly or implicitly in a company’s credit report.

Character
Character includes factors such as size, location, number of years in business, business structure, number of employees, history of principals, appetite for sharing information, media coverage, liens, judgments or pending law suits, stock performance, and comments from references.

Capacity
Capacity assesses the ability of the business to pay its bills, that is, its cash flow. It also includes the structure of the company’s debt, whether secured or unsecured, and the existence of any unused lines of credit. Any defaults must also be identified.

Capital
Capital assesses whether a company has the financial resources (obtained from financial records) to repay its creditors. In general, this portion of the credit report is the one most closely reviewed by the credit analyst. Heavy weighting is given to such balance sheet items as working capital, net worth, and cash flow.

Conditions
Conditions consider the external factors surrounding the business under consideration, influences such as market fluctuations, industry growth rate, political/legislative factors, and currency rates. A credit manager or loan officer will address these issues by locating and reviewing the following:

• Requests for credit information
• Customer-supplied information
• Bank information
• Trade information

These factors are also taken into consideration by other service providers, such as insurance companies for setting premiums. More than ever, companies are using automated decisioning, which means they input scores and ratings that summarize the four Cs into a financial model to determine the risk of doing business with you.