As credit managers our responsibility is to identify and minimize risk. That equates to making sound credit decisions based on basic credit principles, Character, Capacity and Capital. Commonly referred to as the 3 C's of credit these should be the foundation to every credit decision.
CHARACTER
Considered to be the most important of the 3 C's this equates to willingness. A willingness to provide information, a willingness to answer our questions, a willingness to return telephone calls and most importantly a willingness to pay. I was recently told by a client that a customer informed them that although they could pay on time they were not willing to because they wanted to pay when they were ready to do so not under the agreed to terms. This is a reflection of character and in this case this customer lacks it.
CAPACITY
Capacity is the ability to pay. It is not enough to be willing to pay, although that is a good sign; one has to have the ability to pay. That means that current assets exceed current liabilities, which provides net working capital. If current assets are insufficient to pay existing current obligations then how is our new debt to be repaid? It is not necessary to have a financial statement to determine this. What amount of balances is maintained in bank accounts? How much debt is listed on a credit report and what is the payment history?
The answers to these questions give us an indication of the applicant's ability to honor the terms of the agreement he has entered into with us.
CAPITAL
Capital is the ability to raise debt. In the event capacity is lacking does the applicant have the ability to raise additional debt through borrowing against or liquidating assets. To determine the answer to this question we have to ask questions concerning assets, current and fixed, and the ability of the applicant to raise additional debt if needed whether it be secured or unsecured. In addition to our asking these questions the applicant has to be willing to answer, character.
The analysis of the applicant utilizing the 3 C's will determine the criteria that we should use in making our credit decisions. Credit decisions have nothing to do with competition, industry standards and the current market environment. Those factors are utilized in making business decisions that often take precedence over credit decisions. We should understand the difference between a credit decision and a business decision. Which are we making? The type of decision our organization ultimately makes determines whether the news reported is good or bad and once recognized less confusing.
Eldridge Cleaver said it best when he wrote: You are either part of the solution or you are part of the problem .
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