What are the 4 C's of Credit?

The 4 C’s of Credit is a Tool that helps you Maximize your options for obtaining Credit.

  • Or a Loan, or even an Equity Partner.

 

Its main objective is to Guide Professionals on what Financial Institutions consider most Important when it comes to Lending Money.

 

Its name is an acronym for the 4 Metrics that this Method considers most important when asking for a Credit:

  • Character.
  • Capacity.
  • Capital.
  • Conditions.

The 4 C's of Credit with Examples

  • 1. Character: What the Team is Capable of.
    • They want to Trust you; Who you are, your Skills and Temperament.

 

  • 2. Capacity: The Ability to pay back the Money.
    • How much Money you generate, compared to what you ask for.

 

  • 3. Capital: The Capital Structure of the Project.
    • What are your Savings, Debts, and availability to Money.

 

  • 4. Conditions: What are the Conditions of the Credit.
    • Interest, Down Payment, years to be Reimbursed, etc.

 

4 C’s of Credit.

 

In case you read us regularly, you may have already realized How similar this method is to the “5 C’s of Entrepreneurship.

  • Both methods are virtually the same.

 

Yes, both methods are, in essence, the same, but:

  • The 5 C’s splitsCapacityintoCash FlowandCollateral.

Other than that, there is no difference between both Methods.

 

Now, let’s see them in detail with some examples:

 

* In case you don’t know, we have experience in Venture Capital Investments.

  • Therefore, these examples come from our direct Professional experience.

Character - First C of Credit

 

First of all, When somebody asks for a Credit, it is important to:

  • Let Financial Institutions know the Background of the Team Members.
  • Demonstrate that the Company has been successful in the Past.
  • Show all the Goals Accomplished.

 

 4 C’s of Credit Example

 

Let’s imagine that you own your own Software Company.

 

You are Preparing a New and Innovative App, but you need money to do it.

  • That is Why you decide to ask for a Loan.

 

As you are very aware of the 4 C’s of Credit, you first decide to show the Character of the Team.

 

How?

  • You Prepare a list of Projects that you Developed in the Past.
    • And How Successful they were.
  • You Show the Background of the entire Team.
    • With Studies, Professional Experience, etc.
  • You prepare an Exciting Presentation about the entire Project.
    • Showing that, you know how to “sell” a product.

Capacity - Second C of Credit

 

When you ask for a Credit, it is very important to:

  • Demonstrate How you can repay the borrowed Money.
  • Prove a Diversified Source of Income.
  • Highlight all the Options the Company has to Repay its Debts.

 

 4 C’s of Credit Example

 

Let’s follow the Previous example:

  • You own your Own Software Company and want to ask for a Credit.

 

After giving proof of the good Character of the whole Team, you show them:

  • The Different Revenue Streams that the Company has.
    • Currently.
  • The Additional Revenue Streams that would be Created.
    • With the App for which you are asking the Credit.
  • The Ability of the Company to generate the amount of money you are asking for.

Capital - Third C of Credit

 

When you ask for a Credit, your Capital Structure is essential:

  • You have to demonstrate a Healthy Balance Sheet.
  • You have to give evidence of your current Debt position.
  • You must show that you Personally invested in the Project.
    • Or that the Company Re-Invested its gains.

 

 4 C’s of Credit Example

 

Now, the Financial Institution is happy with your Project.

But, they want to check How you have Managed the Money in the Past.

 

You then decide to show them:

  • The Capital Structure of the Company.
    • How much money the Company re-invested, and How much the Shareholders own.
  • Your Debts, Assets, and Expenses.
    • Giving Proof that your Business is indeed a healthy Business.

 

Once the Financial Institution has a Proof of “Financial Health”, it will be open to Discuss the Loan Terms.

  • They don’t want to give money to somebody that will use it to cover other Debts.
    • You can’t imagine How common that is.

Conditions - Third C of Credit

 

Finally it is time to talk about the Loan Terms:

  • You have to agree on the Interest (usually you can’t).
  • You have to agree on the Time you have to return the Money.
  • You have to negotiate the Collateral (if applied).
    • Which Asset will be used as Guarantee in case you can’t Repay.

 

 4 C’s of Credit Example

 

Finally, the Financial Institution accepted to offer you a Loan.

  • But, they want to talk about the Conditions.

 

They want their Money back in 2 years at 5% annual Interest.

 

However, you offer them a good Collateral (the Office) to have one more year to give them back their money.

  • Maintaining the Interest Rate.

 

* Remember: If you want to improve the Terms of your Loan, you have to offer something good.

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