The 3 Cs – character, collateral, capacity – summarize the elements that a financier uses to underwrite a loan. This technique of assessing the client comprises both qualitative and quantitative measures.
Character
Character refers to the borrower’s reputation. The shareholders who are going to guarantee the loan and the management of the business will all come under scrutiny to determine if they are reliable and will repay the funds.
The lender will usually look at the credit history of the business owner to gauge honesty and reliability. Considerations may include:
- Whether or not they pay bills on time.
- Whether or not they’ve used credit before.
- How long they’ve been in business, and what positions they held before starting the business.
- How long they’ve lived at their respective addresses.
Lenders will also look at the credit scores of the owners of the business. This score is numeric, typically between 300 and 850, gleaned from the info in your credit report. High scorers generally have a lower risk. Each lender has its own standards, but many of them use credit scores to assist them in making their evaluations. It all depends on the level of risk they find suitable for a particular credit product.
Credit scores are weighted as follows: 35 percent payment history, 30 percent amount owed, 15 percent length of credit history, 10 percent new credit, and 10 percent types of credit in use.
Collateral
Collateral is any asset used to secure the loan. Savings, real estate, inventory, accounts receivable, and equipment are all assets that could be used as collateral.
The lender asks for collateral because, in the event of insolvency, it can be sold or collected to generate funds to pay the loan. Since in the experience of most lenders asset classes such as prepaid amounts, goodwill, and investments will not raise any significant amounts, they are generally not considered for collateral.
If you’re using a property as collateral, its location and quality, and its adaptability are some of the features your future lender will look at.
Capacity
Most commercial credit officers refer to capacity as cash flow, and it represents the ability of the company to repay debt. Since a big down payment will reduce the risk of default, the lender will consider any capital the borrower puts into a potential investment. In short, the lender is looking at how much debt the borrower can comfortably handle. The following are usually requested from the borrower for the lender to evaluate cash flow/debt service:
- Business tax returns
- Historical financials, such as the balance sheet and profit & loss statements, interim financials, and/or projections
- Personal financial statements for each guarantor
- Rent rolls for leased property
If you’re considering a business loan, understanding the 3 C’s will give you a high-level understanding of what a potential lender will look for. Visit this post for more in-depth information on business loan requirements.
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Information provided on this blog is for educational purposes only, and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strives to keep its content up-to-date, it is only accurate as of the date posted. Offers or trends may expire, or may no longer be relevant.
FAQs
Character, capital (or collateral), and capacity make up the three C's of credit. Credit history, sufficient finances for repayment, and collateral are all factors in establishing credit.
What are the 3 Cs needed to obtain credit? ›
For example, when it comes to actually applying for credit, the “three C's” of credit – capital, capacity, and character – are crucial. 1 Specifically: Capital is savings and assets that can be used as collateral for loans.
What do the 3 Cs of loan lending refer to? ›
Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these characteristics, and then decide whether or not to approve or deny the loan request.
What are the 3 Cs of credit analysis? ›
The factors that determine your credit score are called The Three C's of Credit – Character, Capital and Capacity.
Which of the 3 Cs refers to the loan applicant's ability to repay the loan? ›
Capacity refers to an individual's or organization's ability to repay a loan. It includes factors such as income, expenses, and debt-to-income ratio. Lenders look at a borrower's capacity to repay a loan to ensure that they will be able to make the required payments without defaulting.
What are the 3 Cs of business credit? ›
Character, capital (or collateral), and capacity make up the three C's of credit. Credit history, sufficient finances for repayment, and collateral are all factors in establishing credit.
What does 3 Cs stand for? ›
The 3 Cs of Brand Development: Customer, Company, and Competitors.
What are the Cs of credit? ›
Character, capacity, capital, collateral and conditions are the 5 C's of credit. When applying for credit, lenders may look at them to determine your creditworthiness. And understanding them can help you boost your creditworthiness before applying.
What are the 3 components of a loan? ›
Components of a Loan
Principal: This is the original amount of money that is being borrowed. Loan Term: The amount of time that the borrower has to repay the loan. Interest Rate: The rate at which the amount of money owed increases, usually expressed in terms of an annual percentage rate (APR).
What are the 3 Cs in mortgage? ›
After the above documents (and possibly a few others) are gathered, an underwriter gets down to business. They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.
This method has you focusing your analysis on the 3C's or strategic triangle: the customers, the competitors and the corporation. By analyzing these three elements, you will be able to find the key success factor (KSF) and create a viable marketing strategy.
Which of the 3 Cs refers to whether the loan applicant is honest and trustworthy? ›
The factors that determine your credit score are called The Three C's of Credit - Character, Capital and Capacity. Character: From your credit history, a lender may decide whether you possess the honesty and reliability to repay a debt.
What are the three Cs in competitive analysis? ›
The 3Cs are Company, Customer and Competitor. The intersection of the three is a good strategy with the idea that the company's strength, the needs of the customer and the offerings of the competitors lies the opportunity.
What is capital in the 3 Cs of credit? ›
Capital: refers to current available assets of the borrower, such as real estate, savings or investment that could be used to repay debt if income should be unavailable.
What is a Cs loan? ›
How does Conditional Sale (CS) finance work? In a Conditional Sale car finance agreement, the lender buys the vehicle on your behalf. They pay the dealership for you, and you make fixed monthly payments until you repay the amount you borrowed plus interest.
What are the three Cs considered in deciding to underwrite a loan which uses the debt-to-income ratio as a? ›
In considering your application, they look at a variety of factors, including your credit history, income and any outstanding debts. This important step in the process focuses on the three C's of underwriting — credit, capacity and collateral.
What are the 3 Cs requirements? ›
Requirements engineers need to examine this often incomplete and inconsistent brief expression of needs. Based on the available knowledge and expertise, assumptions are made and conclusions are deduced to transform this "rough sketch" into more Complete, Consistent, and hence Correct (the three Cs) requirements.
What do the three Cs include? ›
Most of you are probably familiar with the three C's on your repair orders — Condition, Cause and Correction — which are a necessity to complete a repair order correctly, as well as a warranty claim submission.
What is the 3 credit? ›
The 3 credit bureaus: Equifax, Experian and TransUnion.
