Sound credit extensions rely on structured evaluation frameworks to balance risk and return.

• The 5 Cs of Credit Framework: Evaluating a borrower’s creditworthiness through five core lenses:

• • Character: Looking at integrity, repayment history, and credit report consistency.

• • Capacity: Assessing the financial ability to service debt using current income streams.

• • Capital: Evaluating the borrower’s personal net worth and skin in the game.

• • Collateral: Reviewing secondary assets pledged to secure the loan if default occurs.

• • Conditions: Considering external factors like interest rate trends and economic health.
• The Principle of Diversification: Spreading loan exposure across different economic sectors and geographic regions to avoid risk concentration.
• Matching Loan Terms to Use: Aligning loan structures with the underlying need, such as using short-term lines for inventory purchases and long-term loans for equipment.
• Risk-Adjusted Pricing: Setting interest rates based on borrower risk, charging higher rates to riskier clients to cover potential defaults.
• The Principle of Repayment Clarity: Requiring a clear, verifiable primary source of cash for repayment before approving credit.