The five Cs of credit

Solomon Masango knows what it takes to be a successful farmer. Over the years he discovered that money is not everything, yet a business cannot flourish and be profitable without it. Lindiwe Sithole, host of African Farming Season 2, travels to Carolina in Mpumalanga to soak up some of the wisdom Masango has gathered over the years.

When a farmer goes to a bank to apply for a loan, he or she might wonder what exactly happens when a credit analysis is done. According to Keneilwe Nailana, Manager: Agribusiness at Standard Bank Group, banks use “the five Cs of credit” when performing a credit analysis. “We usually review a farmer’s situation by looking at things like capacity, capital, conditions, character and collateral,” she explains. 

Nailana describes the five Cs as follows: 

• Capacity – he bank must be sure that the farmer has the ability to repay the loan based on the proposed amount and terms. They look at cash flow, expected income and current debt to determine whether a farmer will be able to pay back the loan. “It is all about whether the farmer has enough capacity in his or her budget to pay for the loan. After all, a business should be able to pay back the loan,” she says. 

• Capital – the bank wants to know what the capital level of the business is when determining creditworthiness. Personal investment into the business, retained earnings and other assets controlled by the business owner are applicable here. “We prefer a farmer to put some of his or her capital in the business, because that means they have some skin in the game.”

• Conditions – The bank will look at the reasons why the farmer wants to borrow money. They are analysed for their need in taking on debt. Reasons differ from one application to the other. 

• Character – “Character refers to the farmer’s reputation,” she explains. In the eyes of the bank, past behaviour is the best predictor of future behaviour. “We look at a farmer’s credit history and how they manage their business to help us with this.” 

• Collateral – this refers to the personal assets a farmer pledges as security for a loan. “The collateral offered will serve as security. Liquidating assets is a last resort for us. Security is one of the instruments used to mitigate the risk.

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