What are the 4 Cs of Credit?

A business’s creditworthiness is ultimately determined by what are known as the “4 Cs of Credit” -- character, capacity, capital and conditions -- most of which can be found explicitly or implicitly in a company’s credit report.

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

Capacity assesses the ability of the business to pay its bills, i.e., its cash flow. It also includes the structure of the company’s debt—whether secured or unsecured—and the existence of an unused lines of credit. Any defaults must also be identified. (The second credit management "C" pertains to the skills, resources and capabilities of the customer. Therefore, capacity analysis should deal with the background of the customer in terms of innovation, business acumen, experience and knowledge in his line of business; the capability of the customer to pay on time; the capability of the customer to get paid on time himself; the level of gearing of the customer; the competitive advantage of the customer in his particular market or niche; the market share of the customer; and other pertinent data that would help in getting to better know the capabilities of the customer)

Capital assesses whether a company has the financial resources (obtained from financial records) to repay their 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 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 answer these questions by locating and reviewing:
-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 to set premiums. More than ever, companies are using automated decisioning, which means they input scores and ratings that summarize the 4 Cs into a financial model to determine the risk of doing business with you.