Creditworthiness and 7C tool for analysis||7 c's of creditworthiness

Creditworthiness is the pivots point of the loan from financial institutions. 

7C's is one of the tool used for analysis of creditworthiness.

The Oxford Dictionary defines the creditworthiness as "The extent to which a person or a company is considered suitable to receive financial credit,  often based on their reliability in paying money back" 

Credit is the lifeline of both individuals and institutions. Creditworthiness is the strength of individual or Institutions in order to make them eligible to receive credit. Creditworthiness is key to access finance from banks or NBFC , subsequently growth and development. Many startup business falls to obtain bank loan only because of there less creditworthiness. 

In the era of CIBIL and other credit score record keeping organization it's very much essential to maintain creditworthiness to obtain bank loans. The process to know your CIBIL score online is very easy and cost effective. Few website provide the CIBIL and other credit score free. Now a days each and every transaction linked with your credit taking ability is recorded by rating agencies. So it's very much essential to maintain better credit score to avail credit or loan from financial institutions. 

Benefits of Creditworthiness:

1. Higher credit limit of loan amount sanction.

2. Less interest rate compared to lesser creditworthy person or institutions.

3. Easy and hassle free sanction process.

4. Less credit risk hence liberal terms and conditions for loan sanction and repayment. 

The prime business of Banking and Non Banking Financial institution is to provide credit to the institutions, companies and individual persons. So they minutely check the creditworthiness of the persons or organisation before they disburse amount. Depending on the working culture of the organisation the process of evaluation changes but this formula is basic Foundation to all type analysis.Moneylenders generally break down the credit value of the borrower by utilizing the seven C's: Capacity, Capital,Control, Collateral , Conditions, and Character and Cash . Every one of these standards causes the moneylender to decide the general danger of the advance. While every one of the C's is assessed, none of them on their own will forestall or guarantee access to financing. There is no programmed equation or ensured rates that are utilized with the seven C's. They are just an assortment of elements that loan specialists assess to decide the amount of hazard the potential borrower is for the repayment of the amount. 

7C's of Creditworthiness

1. Character

2. Capacity 

3. Cash

4. Capital

5. Collateral 

6. Condition 

7. Control

 All the above factors are fundamentally used for evaluation of creditworthiness but different organizations like CIBIL, Equifax, Experian and CRIF Highmark slightly differ from each other in evaluation of creditworthiness and calculation of credit score. Now let's discus the above 7C's in brief. 

Character 

Character as tool for analysis of creditworthiness is most vital factors consider by the lenders because character of the promoter of company or Individual is the most powerful motivation of borrower to repay the money. Responsibility, truthfulness serious purpose and serious intention of replaying the money is the character. The banks try to prevent the wilful defaulters from accessing the loan.

Credit history, Education, Knowledge and skills are also part of character which evaluated by the lenders. For example suppose a bank X received loan application from Vijaya Mallya ,will he get credit or loan?  No, because his character will sufficient for rejection of the application. 

Better the character better the creditworthiness. 

Capacity 

The basic of finance or loan is to give to those people or company who can refund the same and have capacity to replay the principal with interest. The capacity is determined by the Asset, liability, Cash flow, Network, existing debit obligations, industry risk and credit and credit utilization ratio. The cash flow statement of organization and the person is helpful in determining it's capacity.  Next is alternative sources of repayment of the loan amount which is vital because sometimes the serious person also fails to repay the loan because of genuine reason that time this alternative sources helps. Suppose the company have also alternative business he may repay from that source also. In case of Individual having earning spouse is added advantage in repayment of loan. 

Higher the capacity higher the creditworthiness.

Capital

Normally loans are sanctioned for a project or a reason, so applicant must have invested sizable amount in the enterprise or project. The loan applicants percentage of ownership is used to build confidence in the project.   A companies owner must have invested his own money before The Financial Institutions sanction loan. The single biggest reason for failure of any company is under capitalization. In individual case the same also applicable. Ideally the banks sanction up-to 75% of the total project cost this is because they want to share the risk sharing technique. A well capitalised project is better places in obtaining the loan. 

Higher the initial capita higher the creditworthiness. 

Cash

Cash particularly the free cash generated in business or the monthly surplus cash in case of individual case is key to repayment of advance. If someone is earning high but the expense to earn that amount is also more than that then he becomes cash deficiency. Some one have expenses more than income is cash negative so they are not creditworthy. We can use cash flow statement for evaluation of the net cash available for repayment. If Mr X is sanctioned housing loan but his salary is not enough for his existing expenses then they may find difficult to repay. One Company is unable to pay salary to employees, how it will repay the loan to bank. 

More is the surplus cash higher is there creditworthiness. 

Collateral

This the asset which are pledged against the loan. Mean in case the company or the person fails to repay the amount then those asset are auctioned and amount is recovered . Land, factory, shares, bonds, buildings , Bank deposit, Bank guarantee, LIC Policies etc are treated as the collateral for sanction of loan.  Lenders actually sanction the loan against the collateral. In case of gold loan company like Manapuram Finance, Mutooth Finance they take gold as collateral. For sanction of working capital the machine and factory is taken as collateral. 

Higher the collateral higher the creditworthiness. 

Condition

The condition is the overall economic and political environment and it's impact on the the business and it's revenue. The purpose of the loan and it's value addition to the growth of business in current environment is the measure factor for sanction of debit. The  company investing the loan amount in accusation or expansion or purchase of asset then there is more chances for sanction of advance in comparison to the amount used in  date today expenses. During the condition evaluation the strength and number of competitors, size of market, correlation with existing rules and regulations, change in consumption taste and relevant social, economic and political  influence on business.

More favorable the condition better is the creditworthiness. 

Control

Last but not the least factor of creditworthiness is control. This factor check the consistency of the business with the rules and regulations. This also check control on business in achieving it's corporate goals. 

More the control higher the creditworthiness. 

Maintaining the creditworthiness and obtaining desired amount of loan with favorable condition is vital for existence of the company. Now we can check our creditworthiness in form of CIBIL scores. We can check and obtain our credit scores online through simple steps. We can get free CIBIL score from few websites. 

Click here to get free online CIBIL report. 

You feedback is highly appreciated and share the article with like minded individuals.

More Interesting Articles

(1) How to Fill you Form 10(E) online to get tax relief under section 89(1) of Income Tax Act 1961.

(2) Financial Decisions to achieve financial freedom. 

(3) Best online based business to start after this covid-19 pandemic. 

(4) Benefits of Sovereign Gold Bond (SGB) 

(5) New year financial Resolution. 

In

Maintaining the cre