Assessing the True Credit Risk

The five 'C's of commercial credit might represent an effective framework for assessing the credit risk associated with a potential client.

Character (Willingness to pay)

It is important to understand the character of the people behind the organisation and the organisation's past performance so you know who you're dealing with and can assess their ability to satisfy financial obligations. How long has the business been under the same control? Do they have any defaults? What is their track record to date?

Capacity (Ability to pay)

Assessing the prospective organisation's capacity to operate as a going concern and generate sufficient cash flow from operations to repay any debt should be one of the highest priorities of any credit manager.

Capital (Ability to pay)

Capital is the wealth of an entity in the form of money or assets owned - coupled with the commitment from the shareholders. It is not easy to establish the capital behind any organisation but Veda provides information which might assist in determining an organisation's capital.

Cashflow (Liquidity)

Cash flow is the 'lifeblood' of every business and poor credit control will greatly affect cash flow and the ability to pay debts on time. It is essential to carefully evaluate a customer's capacity to meet your credit payment terms by understanding their cash flow position. This information is not readily provided by customers, however there are a number of measures credit managers can take to help determine a customer's cash flow position.

Conditions

What are the current economic conditions in the marketplace? Is the prospective customer sensitive to economic downturns? What are the trends in the industry, community and nationally? Is there an n election looming that may change the political landscape? Will international economic factors have an effect?

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