The standard way to determine a companies credit worthiness can simply be referred to as the four C's of credit: Character, Capacity, Capital, and Conditions.
Character is simply the level of honesty and integrity associated with an individual or company.
Questions often asked to determine the character issue are diverse.
Do they have a great credit rating? Has the business been around for many years or decades? Is the person or business stable? Have they ever had adverse credit? Capacity typically speaks to the ability of a company or individual to meet their credit obligations.
Is the business plan solid? Are there sufficient cash reserves and regular cash flow to repay debts? Capital is simply the measurement of the assets or financial resources of a business or individual that is typically disclosed in a financial statement and historical tax returns.
Conditions refer to the environment in which the business lives and operates.
The industry in which I make my 9-5 living also looks at another C, and that is collateral.
In commercial lending we look at things like debt service coverage ratios, cash flow, and collateral.
Does the business cash flow, and if not when will it cash flow, and can the debtor cover their global debt obligations which is the debt coverage ratio.
The collateral is extremely important in my area of commercial banking because I am dealing with the problem loans or loans that are at the very least identified as being potentially problematic.
If I look at a banking relationship and there is no capacity to repay, no capital to maintain repayment of debts, or the market conditions are an issue, then all I can fall back on is collateral liquidation if the business fails.
Character is very important, but when a business is in a Chapter 11 bankruptcy the debtor's character is not something the BK administrator or the BK trustee uses to determine a proper reorganization plan.
From my specific perspective, in my 9-5 life, I believe that collateral is the only C that matters.
When liquidating a companies assets the amount of collateral pledged to a banking relationship will determine the level of exposure and potential loss.
If the bank is "collateral good" that means that in the event of a total melt down the bank will be able to liquidate it's way out and get repaid.
If there is an issue with the other C's, the CEO has a nervous breakdown or the cash reserves are gone or the environment changes, collateral can always pay back the loan.
Character is simply the level of honesty and integrity associated with an individual or company.
Questions often asked to determine the character issue are diverse.
Do they have a great credit rating? Has the business been around for many years or decades? Is the person or business stable? Have they ever had adverse credit? Capacity typically speaks to the ability of a company or individual to meet their credit obligations.
Is the business plan solid? Are there sufficient cash reserves and regular cash flow to repay debts? Capital is simply the measurement of the assets or financial resources of a business or individual that is typically disclosed in a financial statement and historical tax returns.
Conditions refer to the environment in which the business lives and operates.
The industry in which I make my 9-5 living also looks at another C, and that is collateral.
In commercial lending we look at things like debt service coverage ratios, cash flow, and collateral.
Does the business cash flow, and if not when will it cash flow, and can the debtor cover their global debt obligations which is the debt coverage ratio.
The collateral is extremely important in my area of commercial banking because I am dealing with the problem loans or loans that are at the very least identified as being potentially problematic.
If I look at a banking relationship and there is no capacity to repay, no capital to maintain repayment of debts, or the market conditions are an issue, then all I can fall back on is collateral liquidation if the business fails.
Character is very important, but when a business is in a Chapter 11 bankruptcy the debtor's character is not something the BK administrator or the BK trustee uses to determine a proper reorganization plan.
From my specific perspective, in my 9-5 life, I believe that collateral is the only C that matters.
When liquidating a companies assets the amount of collateral pledged to a banking relationship will determine the level of exposure and potential loss.
If the bank is "collateral good" that means that in the event of a total melt down the bank will be able to liquidate it's way out and get repaid.
If there is an issue with the other C's, the CEO has a nervous breakdown or the cash reserves are gone or the environment changes, collateral can always pay back the loan.