Finance and Accounting - Five C's of Credit - Assignment Example

The main question is whether the borrower will be able to repay the debt. There are numerous financial measures that can be used to establish a borrower’s capacity including liquidity and debt ratios (Graham and Smart 56). The third aspect is capital. The lender takes into consideration any capital the borrower contributes towards the investment. This is owing to the fact that a larger contribution reduces the chances of default.

The fourth element is collateral. Borrowers may apply for credit cards, lines of credit, or loans that secured or unsecured. Secured products including a home equity loan or an auto are considered as collateral (Graham and Smart 56). The value of the collateral is determined and plays an important role in lending decisions. Finally, the conditions including interest rates, principal play a huge part in lending decisions. Mail float contributes to the time delay between when a particular payment is made and when it is received and leads to a delay in the cash collection process.

Processing float refers to the time between the recipe of a specific payment into a company’s account and results in a holdup in the cash collection process (Graham and Smart 523). Finally, the availability float is defined as the time between when the payment is received and deposited into a company’s account and more time is taken in cash collection.