Financing is not an easy process. A person does not give you a loan easily. A lender always goes for the main five C’s of credit when you apply for business loans. It helps them as a guideline to determine who is actually qualifying for financing and who is not. There are many times when The four Cs are referred to depending on the donor. These criteria are used to determine the viability of your business and the likelihood of repayment in point-of-sale finance. For your business financing is very crucial that acts as a horizon for your business. It acts as a horizon for them either for consolidating debt, funding an expansion project, or simply covering working capital needs. So it is important to know what 5 C’s are, how it works and why it is important for point of sale finance.
So what do you mean by the Five C’s of Credit?
The five C’s of credit is a process that helps a lender to gauge the creditworthiness of potential borrowers. It helps a lender to verify during giving a loan. It depends on five characteristics of the borrower and conditions of the loan, consequently, the risk of a financial loss for the lender and attempting to estimate the chance of default. So these five C’s for point of sale finance is:
- Character
- Capacity
- Capital
- Collateral
- Conditions
So now we are discussing the five important factors:
1. Character :
In the 5 C’s Character is one of the methods which is considered as First C. It acts as credit history. Character helps a lender to borrow a track record or reputation to repay debt. In the borrower’s credit report they got the information. Experian, TransUnion, and Equifax are the three elements that help credit bureaus to become generated. There are credible reports that contain the perfect information related to how much an applicant has borrowed in the past and whether they have repaid loans on time. These reports also explain information on collection accounts and bankruptcies, and they retain most information for seven to ten years. Information that a lender gets from these reports helps them to evaluate the borrower’s credit risk.
As an example, you can consider the firm FICO. It utilizes the information that is found through a consumer’s credit report for creating a credit score. There are tools lenders who look at credit reports but before that use for a quick snapshot of creditworthiness. There are sources of FICO which range from 300 to 850. It is designed in such a method which helps lenders to predict the likelihood that an applicant will repay a loan on time. There are many more firms like Vantage that act as a scoring system that is created by Equifax, collaboration of Experian, and TransUnion, and also give information to lenders.
There are many lenders who have a minimum credit score requirement. They require before an applicant is approved for a new loan. This credit score requirement comes from lender to lender. Then it goes from a loan product to the next. If you have a higher borrower’s credit score then it is a must to have a higher likelihood of being approved. For setting the rates and terms of loans the lenders always rely on credit scores. It helps them to get an attractive loan from borrowers who have good-to-excellent credit.
2. Capacity :
Capacity is another C that tells about the ability of your business to repay a loan based on your current cash flow. There are many lenders who want to know if you can handle new monthly loan payments or not. They also take care in addition to any other debt that you owe and your everyday operating expenses. Sometimes they consider your capacity by examining your monthly revenues and expenses. For business debt and assets like real estate, cash savings, or investments it can help you. You can get proof of capacity through business bank account statements, loan statements accounts receivable, and accounts payable. Sometimes lenders want to know how you can. liquidate assets if needed. They also Take care of how much of your business income goes toward repaying debt each month.
3. Capital :
During a loan, a lender tries to analyze the capital level of a borrower while determining creditworthiness. For capital of business-loan application, they consider personal investment into the firm as well as retained earnings and other assets that are controlled through the business owner. But when it turns to personal loan applications they consider the borrower’s savings or investment account balances. A lender looks at the capital. In addition to repaying the debt obligation it should income as well as revenue be interrupted while the loan is still in repayment.
If you don’t have any savings and even if you want a loan then the lender also looks after some things like a downpayment for approval.
4. Collateral :
Collateral is a kind of Personal asset that is pledged by a borrower. It helps them to give security during a loan. There are many business borrowers who use equipment or accounts receivable to secure a loan sometimes. They do so when individual debtors often pledge savings, a vehicle, or a home as collateral.
5. Condition :
Conditions refer to the state of your business and the projections that are for your future financial health. It can consist of the individual’s business performance. It is considered the industry as a whole. Conditions also look after the loan that is used as well as how that benefits your business. If you want to plan for using a loan for buying equipment or inventory, for instance, then the lenders sometimes ask to give a perfect explanation of how that will advance the bottom line.
Wrapping up:
So these are the 5 C’s of Point-of-Sale Finance. During the loan, there are many people who become confused. So then if you go for these conditions then you can easily go for a loan for your business as well as for an individual loan.
Author Bio :
Allison Janney is a Sales & Marketing Manager at ChargeAfter. She would like to share content on Finance Industry like Point of Sales financing, Buy now Pay later, consumer financing & Ecommerce financing for valuable reader.
