Anyone wishing to offer the customer term payment options needs a well-defined strategy, which includes deciding the type of audience that will have this alternative. For this, a good method is in the so-called 5 credit C’s. Do you know what it is about and how to apply it to your business?

When to offer credit

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Forward selling is often a strategy for attracting new customers and retaining old ones. There is not necessarily an increase in billing, which depends on the expected receipt being made. Despite applying for competitive advantage, offering facilitated payment terms requires planning, otherwise it will result in loss.

Retailers, especially, can sell on the end-consumer credit card. It is practical for both sides, convenient for those who can get up to 40 days to pay and advantageous for you, who receives the value with the small discount and passes the risk of default to the bank. When the negotiation takes place between companies, the situation changes. To grant credit, who acts as supplier uses the duplicate. It is nothing more than a security, consisting of several monthly installments.

It is an agreement between you and your client, without intermediaries.

Although it does not involve fees, there is a risk entirely post by those who offer payment in this way. If a portion is not paid, the seller does not receive and then needs to charge. If it was a forgetting, it will be easy to solve. But what if it is bad faith or the result of serious financial difficulty? Difficulty in recovering credit not paid by the defaulting customer is one of the main reasons for your business to plan as well as who will grant such advantages. And this is where knowing the 5 credit C’s can make a difference.

5 Credit C’s and the Customer Profile

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Financial institutions offering credit need to analyze characteristiC’s of those who apply for credit before deciding whether or not to approve such requests. Hence comes what is commonly referred to as the 5 C’s of credit, a valid instrument to be applied also in the micro and small business strategy. Let’s understand each of the components better.

Capacity C

The first aspect to consider before granting credit concerns the applicant’s ability to meet its commitments and effectively repay the loan obtained.

But how is this analysis done? The financial institution will note items such as the cash flow of the requesting business, the existence or otherwise of alternatives that may be used for the repayment of the loan, the age of the company, the profile of the partners and the sector in which it operates. how credit will be employed. All of these factors must go into the ability to pay assessment.

C of collateral

The second C refers to the guarantees given in exchange for the granting of the loan. These can include all company equipment, real estate, inventory, accounts receivable and anything that can fulfill the collateral function for the supplier if the loan amount is not properly paid.

In this item, the figures of the guarantors of the negotiation, which may be the partners of the requesting company in the form of individuals, are also usually allocated. The higher the collateral, the higher the chances of success in repaying the loan proceeds. And that is precisely where the term collateral comes from.

C of character

Our next C refers to careful observation of the financial history of the company applying for credit. At this stage, it is essential that loans previously taken by it be reviewed. This will allow the grantor the advantage of understanding how the applicant has behaved, properly paid what he has requested and has respected deadlines, for example.

The analysis may also include the profiles of company partners as individuals, verifying their suitability and honesty. In the case of start-up businesses, even, this will be the main item to be evaluated, as the company itself does not have a relevant track record to obtain accurate conclusions.

C of conditions

This next credit C indicates an obvious but no less important action. When analyzing the conditions of the credit applicant, the objective is to assess the moment the company is going through, the situation in which its enterprises are, the prospects for the market and whether the business is on the rise, stagnation or fall. .

For this analysis to be carried out properly, beyond the company itself, the entire economic context must be taken into account, including even the applicant’s competitors. One must always remember that in the institution will offer credit if it realizes that the borrower will not be able to afford it.

Capital C

Our last C is the simplest to understand, precisely because of its relevance. Capital refers to the net worth of the company and its partners.

The analysis of this component measures the possibility of the applicant having other resources to invest in the business, regardless of the credit demanded. For example, the return on available capital and the level of indebtedness of its equity should be observed.

Use the 5 C’s of credit in your company

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Business lending is eventually discouraged by fears of default. With the use of 5 C’s, it is clear that this need not be. If this is a useful tool for financial institutions, where loan application analysis is routine, why would it be any different when dealing with their clients?

On the other hand, if you need to buy on time, look at your financial reality and see how well you can meet the five components presented in this article. If you are a good payer, have guarantees to offer, have a satisfactory net worth and can demonstrate the viability of your project, it will be easier to get the credit you need.

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