Professional Documents
Culture Documents
5 Cs of Credit Course Presentation
5 Cs of Credit Course Presentation
The five Cs of credit is a framework used by credit analysts to measure the creditworthiness of
potential borrowers.
Lender Borrower
• Determine the risks of • Improve the 5 Cs
potential borrower • Get more favorable terms
• Determine the loan terms and lower interest rates
and interest rates
Character describes:
Strengths & Business &
• The company and management team’s Weaknesses Financial Acumen
reputation and credibility.
• The management team’s ability to
deliver on its promises.
Attitude Attitude
towards Risk towards Growth
01 02
Assess the company’s Assess the
history and operations management team
• People
• Process
• Information systems
Planning Organizing
Leading Controlling
Capacity refers to whether the borrower has To assess capacity, the credit analyst
the ability to service and repay its debt. needs to evaluate:
The statement of cash flows is used to identify the company’s sources and uses of funds.
The statement of cash flows is used to identify the company’s sources and uses of funds.
The statement of cash flows is used to identify the company’s sources and uses of funds.
The statement of cash flows is used to identify the company’s sources and uses of funds.
Debt or equity
Pay dividends
Cash flows are driven by the income Ratios and trend analysis
producing ability of a company.
Total Liabilities
Debt to
=
Equity Ratio Total Shareholders’ Equity
Profitability Ratios
Gross Profit
Gross Margin Ratio =
Revenues
Efficiency Ratios
Measure how well a company is utilizing its assets.
Revenues
Asset Turnover Ratio =
Total Assets
Revenues
Receivable Turnover Ratio =
Average Accounts Receivable
Sales Assets
Profits Debt
Capital explores:
Inventory
Leverage Ratios
Measure the amount of capital that comes from debt.
10% Equity
Total Liabilities
Debt to Equity Ratio =
60% Equity
Total Shareholder’s Equity
90% Debt
Total Liabilities
Debt to Assets Ratio = 40% Debt
Total Assets
Company A Company B
Debt to Assets: 0.40 Debt to Assets: 0.90
Loans should never be made based on collateral alone. Cash flow capacity should be the main determinant.
Security is only a back stop to protect the lender in the event of a default.
The collateral of a borrower relates to what assets the company has available in order to
secure debt in the event of a default.
It’s important to assess the quality of the collateral using the 4 criteria outlined below:
Assessing the industry means assessing the market conditions that are
affecting the industry and its attractiveness.
• How likely is the industry to survive over the next several years?
• What factors will influence its sustainability?
Porter’s 6 Forces
Threat of potential entrants
Intensity of
industry rivalry
Political
Legal Economic
Technological
Corporate Finance Institute®
Competitive Position
• How is the company managing risk related to any threats or opportunities identified?
• Has management spent time conducting a similar analysis?
• Do they understand their own strengths and weaknesses?
• What are the critical success factors required for the company’s own sustainability?
SWOT analysis
Internal
Strengths Weaknesses
Factors
External
Opportunities Threats
Factors
Specific loan
Better understanding
conditions
Lender Borrower
Specific loan conditions can have a large impact on the overall risk associated with a specific loan.
Environmental comments