June 23, 2022

What Are The 4 C’s of Credit?

3 Minute Read

There’s a good chance you may have heard of the 4 C's of Credit at some point in your life. But what do they mean? This blog post will explain each of the four C's and how they impact your lendability. Read on to learn more.

The Four C's of Credit are underlying principles of credit extension, whether it be on your home, car, business, or in our case, arcade games. They are an excellent guideline for understanding how lenders think.

The 4 C's of Credit

1. Capacity

2. Capital

3. Collateral

4. Character

Understanding the 4 C's of Credit

Capacity: This is your ability to repay the loan. If you are a homeowner, this is calculated as your debt-to-income ratio or the ratio of your monthly payment obligations to your gross monthly income. This becomes a bit more nuanced for a business but boils down to having the monthly cash flow to comfortably cover expenses and debt obligations. 

Frequently, we look at an arcade as a new or additional source of cash flow for a business, so we measure expected earnings against the financing payment.  

Capital: This is how much money an applicant has and provides a backstop if there are any issues with cash flow; a lender will likely look to the applicant as a debt guarantor. Additionally, lenders are looking for how much skin in the game you have in the business. The more "skin," the less likely a borrower is to walk away if the going gets tough and is, therefore, more likely to work with a lender.

Collateral:  A loan or lease is accompanied by security. The more comfortable a lender is with the collateral, the accessibility, and re-salability of the collateral, and the more willing they will be to lend. Think of a car dealer; they are eager to lend on cars because they know they can easily resell a used car in case of default. 

As a distributor, we are very comfortable lending on arcade games because we understand the value of used equipment and the marketplace.

Character: Most textbooks refer to this as "credit history," but this is so much more to a lender, especially a relationship-based lender like Betson. This speaks to a borrower's openness about their business, communication if there are difficulties, and making good on promises. 

Communication is a massive part of evaluating character. It frankly should be another C. Like a teacher loves students who participate and turn in their homework, lenders like borrowers who pay as planned, on time, and are responsive when needed. 

In Conclusion

The 4 C's of Credit are an excellent guideline for what lenders look for when you borrow money. By understanding these principles, you can put yourself in a much better position to get the loan you need for your arcade games or other equipment needs for your business. If you have any other questions about credit or lending, don't hesitate to call us today. We would be happy to help.

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