The 3 C’s of Credit

All lending is based upon the principle of the three “c”s. These are:

  • Cashflow
  • Collateral
  • Credit


Cash flow is a summary of not only Profits and Losses, but the changes in the Balance Sheet (Assets and Liabilities) as well. Simply put, it is the explanation of the amount of cash you have in the bank at the end of the period.
In a very simple example, let’s assume your business had a net income of $10,000 for the month. If you provide credit for your customers, you would have Accounts Receivable. Let us say your Accounts Receivable was $40,000 when you began the month, and when the month ended your Accounts Receivable was $35,000. This change of $5,000 was an increase to your cash flow.

Let us also assume your Vendors provide you credit. In doing so, you would have Accounts Payable, which for this purpose at the beginning of the month was $30,000 and at the end of the month was $20,000. This $10,000 reduced your cash flow. So if we take into consideration the $10,000 income, added the additional $5,000 you received by lowering your Accounts Receivables then subtracted the $10,000 you used to lower your Accounts Payable, your cash flow for the month would be $5,000. As you can see, Profit and loss statements can differ greatly from Cash flow.
Cash flow management is one of the secrets successful businesses use to grow during the good times and survive during the tough times. It helps you to understand the importance of Accounts Receivable management, as well as the benefit Vendors can be in providing extended terms.
Every business has a hidden cost component, this is what we will refer to as the cost of the Working Capital. Monitoring your cash flow will help you determine the adequate level of Working Capital you will need. To summarize, cash flow is a key indicator as to how sufficient your Working Capital needs are being met.

The first two are the easiest to document, for cashflow is simply the amount of money you bring in and collateral represents what assets can be pledged as a guarantee for repayment. This leads us to the biggest wildcard and most misunderstood of the “C”s which is Credit.


Wikipdeia states that collateral is a borrower’s pledge of specific property to a lender to secure repayment of a loan. The collateral serves as protection for a lender against a borrower’s default- that is, any borrower failing to pay the principal and interest under the terms of a loan obligation. If a borrower does default on a loan (due to insolvency or other event), that borrower forfeits (gives up) the property pledged as collateral – and the lender then becomes the owner of the collateral. An everyday example would be the typical mortgage loan transaction. The real estate being acquired with the help of the loan serves as collateral. Should the buyer fail to pay the loan under the mortgage loan agreement, the ownership of the real estate is transferred to the bank.


Let’s clear the air first and foremost, there is no “specific” credit reports. All reports are compilations of many strings of data that are organized into a specific reporting format to become a “credit report”. For every account you have, there is a unique data string which contains all the information pertinent to your account including codes for the vendor, payment history, dollar amounts of high credit, balance and credit limit. All of the strings which have your identifying number (usually a social security number) are then compiled into a report. In order to have a credit score, there must be a system to determine how components are compared with each other and with what importance they are in affecting the score (weighting). This is the primary reason you can apply for a car and have one credit score with a bureau then apply for a house the same day and have a completely different score form the same bureau! So to master personal credit, one must know the system in which they weight the credit history and work to conform the scores to get the approvals. There are numerous ways to improve one’s personal credit score but that is a topic for another time.

In understanding the essence of credit, we need to identify the two primary kinds. Credit is primarily broken into two separate categories, business and personal. To get a better understanding, we first identify the primary difference between personal and business credit. With personal credit, utilization is key. That means using your credit efficiently will get you more credit. An example of this would be as if you obtained a universally accepted charge card. If you stared with an available credit of $5,000, the credit company would expect you to either charge $1,000 monthly (or roughly 20% of the available balance) or maintain a balance of $1,750 (roughly 35% of available credit.)get a higher approval rating if you are only using a small portion of your available credit. Both examples demonstrate what many institutions call optimum usage. The reward for maintaining one of these ratios is an increase in available credit at a later date. Over time the ratios and the weight given to these two indicators may vary from institution from time to time, however for the last several years, they have remained universally consistent.

For a business the opposite is true. A bank wants to see maximum utilization of its credit facility with lots of activity There are no ratios regarding business credit, simply put, the more the better. The main premise for this is recognizing that business is constant and assumed that most credit issued to businesses is trade accounts which are typically paid in full every thirty (30) days.