What is the 7 C's of credit?

Answer 1

Character. You must be comfortable with the borrower's integrity and confidence in his willingness to repay you. Have you met the customer? What is his reputation in the community? Is he an upstanding guy or is he a dead beat? You may consider checking references with other business-owners with which the customer does business.

Credit History. No financial institution would ever loan money to an applicant without first checking his or her credit history. As a potential creditor, you also have the legal right to obtain the borrower's credit report and examine it in determining whether or not you can risk extending the credit. Always tell the customer you will be checking his credit report and get written permission before actually doing so.

Career History. Ask about the borrower's business. Is it a successful business venture? Has he been in it for a while? Has he had failed business ventures in the past? His past successes or failures may be determinative of his future business success.

Capacity. In what capacity is your credit going to be used in his business? Is it part of his inventory? Will the use of your goods enable him to generate sufficient funds to repay you and any other creditors? You may consider going over his inventory records with him. The faster he moves his inventory, the more likely his business is a success. And the more likely he will be coming back to order from you again soon.

Capital. What is the borrower's financial net worth? A customer with a positive net worth can survive low cash flow times in his business and still pay your invoices.

Collateral. You may consider extending only "secured credit." This usually means having the customer pledge real estate or his inventory on a UCC in exchange for your providing the credit. If he defaults on the loan, you get the pledged property. Just make sure the property hasn't been pledged before, or you'll have to get in line if the customer defaults.

Conditions. Always make sure the conditions of the sale are clear and in writing, signed by the borrower. This includes payment dates and amounts. If he defaults on any of the conditions, your collection efforts will go much more smoothly if the conditions of the credit are clear.

Once you have "sailed through" The Seven C's to determine the creditworthiness of your customer, be sure to consider this last bonus "C" before making your final decision:

Collections. Bear in mind your own receivables. If your cash flow isn't what it needs to be, you may not be able to afford extending more credit at this time. Remember that your customers' overdue accounts with you significantly impact your owncompany's creditworthiness.