The Four C's of Business Credit

A business's creditworthiness is ultimately determined by what are known as the four C's of credit: character, capacity, capital, and conditions, which can be found in a company's credit report.

1. Character includes factors such as size, location, number of years in business, business structure, number of employees, history of principals, appetite for sharing information, media coverage, liens, judgments or pending lawsuits, stock performance, and comments from references.
2. Capacity assesses the ability of the business to pay its bills; that is, its cash flow. It also includes the structure of the company's debt, whether secured or unsecured, and the existence of any unused lines of credit. Any defaults must also be identified.
3. Capital assesses whether a company has the financial resources (obtained from financial records) to repay its creditors. In general, this portion of the credit report is the one most closely reviewed by the credit analysts. Heavy weight is given to such balance sheet items as working capital, net worth, and cash flow.
4. 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; and trade information.

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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 four C's into a financial model to determine the risk of doing business.