The 4 Cs of Credit - Which is Most Important Today?

I’m always curious as to what trends are developing in the world of due diligence from a trade credit risk perspective.  I have come across a discussion on this same topic from a banking perspective that I’d like to share with you.

Banks use 5 Cs while trade creditors use 4.

The one C that is in the first list and not the other is Collateral, as most trade creditors do business without the security of collateral being put up by the borrower.

Without Collateral, it’s Character that takes the higher importance of the remaining 3 Cs, which are Capacity, Condition & Capital.

The increased global focus on credit risk from banking, financing and trade perspective demonstrates one common denominator when carrying out due diligence, the importance of Character.  Character, the forgotten C of the 4 Cs of Credit, is making a comeback amongst B2B customers.

For the past 25 years the evolution has been towards evaluating a company’s ability to retire obligations.  The focus has been on Capacity, Condition, & Capital which helps answer the ability to pay question.  These three Cs of Credit do a very poor job of answering the more important question of Willingness To Pay.

To do a more complete job of evaluating over-all Risk, especially in the SME markets, the focus of due diligence needs to return to the “Character” factor. This means re-evaluating some of the questions directed to prospective customers about themselves when applying for credit; be it trade credit, loan financing or receivable insurance and financing.

Your comments are always welcome.

Best wishes to all….

Comments

[Bad Credit Loans]

I can see why collateral is important to the bank as it gives them a sense of security that in-case of any financial trouble or default there is something to go after.