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Unformatted text preview: C RED I T EVALUAT ION AND SCOR I NG 0. REQU I R E D I N FOR MAT IO N 1. F inancial statements 2. Credit reports on payment history of the fi rm w ith other fi rms. 3. Banks 4. The payment history of customers w ith the f i rm. A. 5 Cs of CRE D I T EVALUAT ION: 1. Character: The willing of the customer ( bor rower) to meet credit obligation. 2. Capacity: The ability of the customer ( bor rower) to meet credit obligations out of operating cash flows. 3. Capital: The financial reserves of the c ustomer (bor rower). 4. Collateral: Assets of the customer (bor rower) p ledged in the case of default. 5. Conditions: General economic conditions in t he business line of the customer (bor rower). B. 5 Ps of C RED I T EVALUAT ION : 1. People: the general conditions of the c ustomer (bor rower). (back-ground, business h istory, reputation, and banking records). 2. Pu rpose: the usage of funding or lending ( working capital, equipment, plant, office b uilding). 3. Payment: the financial resources for r epayment (sales revenue, net income, cash f lows). 4. P rotection: credit and collateral of the c ustomer (bor rower). 5. Perspective: Perspective on the business line a nd persistent operation of the customer ( bor rower). C. CRED I T SCOR I NG: T he process of quantifying the probability of d efault when fi rms grant t he customer ( bor rower) credit. ...
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