Capacity (5 C's of Credit)
What does it mean
In the 5 C’s of Credit Framework, Capacity refers to the ability of the borrower to generate sufficient and sustainable cash flow to pay their loans.
Why does it matter
Capacity matters because the main goal of giving a loan is to ultimately get the money back (+ interest :). Gauging a borrower’s ability to generate cash flow into the future to repay the loan is one of a banker’s primary tasks. When gauging a borrower’s income stream, a prudent banker will qualify the income based on the following criteria:
- Stable - How volatile is the income
- Recurring - Has the income been consistently available in the past
- Likely to Continue - Is it like the income will be consistently available into the future
Using these criteria, you will identify which income you can rely on to gauge a borrower’s ability to repay. Why should we look for income that meets these criteria? Because we are looking to match this income up with our new loan payment, and guess what are some characteristics of our loan payment: Stable, Recurring and Likely to Continue. By viewing capacity this way, you position yourself in the best possible way to get your loan repaid.
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Greetings! I'm Clay Sharkey, and there is nothing I like more than assisting others in achieving their goals. I firmly believe that by enhancing a banker's understanding of their customer's' business, they can provide superior service. This superior service, in turn, leads to stronger relationships for the bank, improved performance for the businesses, and better experiences for our communities. Win-win-win.
