Posted January 19, 2024 | By: Carrie Cholak
Achieving financial stability and wellness requires regularly revisiting your financial goals and ensuring you are on track to meet them. One important aspect of this is managing your credit effectively. Good credit can provide access to better interest rates, flexible payment options, and more favorable terms and conditions.
For growers, understanding the variables that lenders use to evaluate creditworthiness, known as the “5 Cs of Credit,” can help you proactively manage your credit and establish or maintain financial wellness. The 5 Cs are Character, Capacity, Capital, Conditions, and Collateral.
Character
Lenders evaluate your character by looking at your credit history and credit score. They want to see that you make payments on time and have a plan to pay your bills. For new borrowers with limited credit history, lenders may assess character through a conversation about your business plan, cash flow, and repayment strategy. Demonstrating good character can also involve proactively communicating with your lender if you are experiencing financial hardship.
Capacity
Capacity refers to your ability to repay a loan. Lenders consider your debt serviceability ratio and want to see that you can make payments without becoming overextended. You can increase your credit capacity by paying down debt or increasing your income.
Capital
Capital refers to the investments you have made in your business, such as land, equipment, and inventory. Lenders want to see that you have “skin in the game” and are invested in your operation’s success.
Conditions
Conditions include the terms of the loan and any economic conditions that may impact your financial stability. Lenders also consider the purpose of the loan and what you are financing. If you are not satisfied with the conditions presented to you, you can explore alternative financing options or seek help from a mentor or finance expert.
Collateral
Collateral refers to an asset used to secure a loan, such as a car or home. Not all lenders require collateral, but providing it may affect the interest rate. It is important to consider the implications of providing collateral, such as the impact on reselling the property or the consequences of defaulting on the loan.
In summary, understanding and managing the 5 Cs of Credit can help you proactively manage your credit and work towards overall financial wellness. By focusing on these variables, you can improve your access to credit and attain better financial opportunities. If you are interested in other steps you can take to strengthen your credit profile, download our cash flow white paper found at www.NutrienFinancial.ca.
Carrie Cholak is a Territory Sales Manager for Nutrien Financial, covering Alberta. She has twenty years of experience in the cattle and crop input financing space.
