Credit risk, or the risk of customer payment default, is very important for all businesses, but it can be a matter of success or failure for a small business enterprise.  A small business must manage their credit risk well in order to ensure their business can function.  Credit risk is a key issue that has to be managed diligently in order to keep your business on the path towards growth and prosperity.  Many small business owners ignore credit risks associated with building their business, as credit risk is often not an immediate concern, but it becomes one when there is a problem.  It is very difficult to manage a perilous credit issue after the fact.  Business owners need to proactively manage their credit risk in their business in order to be successful.

We will start our discussion with the 5 Cs of Credit, which are the 5 key criteria used as the basis for evaluating a credit decision and ensuring the decisions that are made are made to credit-worthy borrowers.

Character – Now commonly referred to as credit history; in real life, this is the payment history collected by credit bureaus and used by any lender.  In the past, credit decisions were more personal, and character also included an evaluation of an applicant’s background.  The underwriter would make a personal evaluation of the applicant’s character, i.e., did he or she believe you were an honest borrower.

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