Get to Know The Three Cs of Lending: Cash Flow, Character, and Collateral

Lending - Complete Controller

What are the 3C’s of credit?

When used, this system weighs the three characteristics of a borrower and determines whether the borrower is eligible for a loan or not. The 3 Cs of credit are character, capacity, capital, collateral, and conditions. These components help the lender understand the owner and the business and determine creditworthiness. Knowing each of the 3 Cs of credit will give you a better understanding of what the borrower needs and how to prepare for the loan application process.

The lender can view a borrower’s credit reports, credit scores, income statements, and other documents relevant to the borrower’s financial situation. It allows the lender to make decisions based on the findings. In addition, they also consider information about the loan itself as it also determines the borrower’s creditworthiness. We will study these 3 Cs separately in the next section, including their role in credit analysis. ADP. Payroll – HR – Benefits

  1. Character

Character is one of the 3 Cs of credit. Lenders need to know that the borrower and guarantors are trustworthy. In addition, the lender must have the assurance that the applicant is capable and has all the required education to run the business successfully. Consequently, credit institutions may require a degree of management experience. Other factors that the lenders consider include the applicant’s credit history and whether the borrower has a criminal record.

The lender is equally interested in the borrower’s record of paying debts. That is why the first C is also called a credit history. They examine the borrower’s credit reports, which contain information about how fast the borrower has been in the past with repaying debt. It helps the lender to evaluate the borrower’s credit risk.

  1. Capital

It is another member of the 3 Cs of credit. It is the amount that the loan applicant is willing to invest in his business. Lenders also want to know the applicant’s investment in the proposed company. They will want to know if the applicant is willing to contribute personal assets to grow the business. It indicates the applicant’s willingness to take unique risks to ensure the company’s growth. A significant contribution from the borrower suggests the applicant’s seriousness, increasing his chances of qualifying for a loan. For example, it is relatively more straightforward for an applicant who can make a down payment on a home to obtain a mortgage. He also avoids the obligation to take out an additional private mortgage insurance (PMI). Download A Free Financial Toolkit

  1. Collateral

Collateral is an asset that the applicant offers to serve as a secondary payment source for a loan. They help the applicants secure loans as it assures the lender to get his loan back if the borrower defaults on his loan. In most cases, the subject of the loan application often determines what the collateral will be. For example, houses are collateral for mortgages, while cars are collateral for car loans.

Loans secured by collateral are often referred to as secured loans or secured debt. Unlike unsecured loans, they are usually issued with lower interest rates and better terms.

Why are the 3 Cs of credit important?

Lenders use 3 Cs analysis to decide whether a loan applicant qualifies for the credit and determine the related interest rates and credit limits. They also help determine a borrower’s risk or likelihood that you will repay the loan’s principal and interest in full and promptly. Cubicle to Cloud virtual business


Understanding the 3 Cs of credit is critical to your ability to access credit and do it at the lowest cost. We already know what the 3 Cs of credit are. Delinquency in just one area can dramatically affect the praise you get. If you find that your bank is denying you access to credit or only offering it to you at high rates, you can use your knowledge of the Five Cs to do something about it. Work on improving your credit score, save for a more significant down payment, or pay off some of your outstanding debt. Also, make sure you have some valuable assets that can serve as collateral, as this will also increase the chances of them approving your loan.

 We usually refer to the credit report as the 6th C. Note that banks in all parts of the world have different criteria for ranking the 3 Cs. You can find sources for PDF copies showing how foreign banks rank the 3 Cs for credit applications.

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