Five C’S Of Credit (In A COVID World), Part 1

Posted on February 15, 2021 Published by

We flipped the calendar to a new year (thank goodness!). But there are many things that have remained the same. With the new year comes the collection of year-end financial statements and annual review time. Along with the obligatory risk rating review. Considering the extraordinary conditions and circumstances caused by a pandemic, is the process still the same? Should it be? Perhaps revisiting Five C’S Of Credit (In A COVID World) is in order.

At the risk of being to politically correct, the answer may be yes and no.

On the “yes” side of the argument is that risk rating analysis and assessment is still governed by the same basic and fundamental considerations that have guided commercial (and consumer) lenders for years: The Five C’s of Credit. However, on the “no” side, there is plenty of evidence to support either a change in emphasis among the factors. Minimally, a change in focus within the factors could be considered.

Ultimately, the 5 C’s are nothing more than a systematic approach for lenders to gauge credit worthiness of a potential borrower. The purpose is to measure five characteristics of a borrower, and the terms/conditions of a proposed loan to determine the probability of default. That said, we will take a brief look at each of the Five C’s. It might be a bit different for a 2020 analysis.

In this first of a two-part series, we will take a look at two of the Five C’S Of Credit (In A COVID World). We will also provide additional focus to each for consideration in the annual risk rating review process.


This may be the “C” that traditionally receives either little attention or a perfunctory analysis. Generally, the character assessment includes a review of credit history primarily provided by credit reporting agencies. Some assumptions get made that history is predictive. How one handles personal credit is indicative of how an owner manages business credit. This analysis may be supplemented with a lien and judgement report such as LexisNexis Risk View. In some cases, a formal background check.

These are all sound procedures, but the consequences of the pandemic in 2020 may prompt some other questions as well. For example, if the business was experiencing cash flow difficulties, what action did the owner(s) take? Did they voluntarily reduce their compensation? Did they access personal funds and contribute to the company to support cash flow needs? If the business was having difficulty meeting its loan obligations, was the owner proactive in contacting the lender to propose and negotiate new terms and conditions? What about including providing guaranty’s (if one did not exist), new projections, increased reporting, etc.? Answers to questions like these may illustrate character more than a credit report. After all, as I quoted from Ben Franklin in last month’s blog, “a good example is the best sermon.”

Capital (Financial Condition)

Traditionally, this “C” has focused on items such as balance sheet leverage (including debt to worth and/or tangible net worth) or cash flow leverage (including Senior Debt to EBITDA or Total Debt to EBITDA). Where relevant, terms and conditions of non-bank debt – including owner or subordinated debt – are reviewed with particular concern for default provisions, cure provisions, and collateral positions. Depending on the borrower performance, the industry in which it operates, and the 2021 outlook, a more thorough look at liquidity may be appropriate. An evaluation of the current cash position is certainly important. Also, analyzing the number of months of cash carry is available if the business is in a negative cash flow position (i.e., cash burn). A critical evaluation of both accounts receivable and accounts payable is recommended. Several questions are considered, such as:

  • Is there a slowing of collections in receivables compared to previous years? Delinquencies? Payment plans?
  • What industries are the obligors involved in? What about payables?
  • How current is your borrower in comparison to previous years?
  • Are payment plans in place; are vendors “restless” for payment?

As it relates to bank obligations, regulators have expressed some willingness to allow short-term restructure of debt obligations without adverse ratings. However, multiple restructures and accommodations are likely to raise concerns as to Troubled Debt Restructure.

PPP And Government Loans

Finally, when reviewing borrowers that took advantage of the PPP or other government loan and support programs, the lender should make an inquiry into where the borrower stands regarding application for loan forgiveness. And/or an audit of the use of loan proceeds that may impact future loan repayment.

While the preceding thoughts are not revolutionary, perhaps they can assist in providing some additional focus as we begin a regular, routine process against the backdrop of an extraordinary year. In part 2 of this series, we will look at the final three “C’s” – Collateral, Cash Flow, and Condition (Economic) in the Five C’S Of Credit (In A COVID World). Without question, the business climate of 2020 was unique and will challenge all lending and credit professionals to utilize their skills in new and creative ways.


Richard Rudolph is Senior Consultant at Enlighten Financial, a specialized consulting firm that focuses on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape. We lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to Rick directly, please call: 920.445.8133.



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