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Principles of 5C Loan Analysis

“Real Estate Loan Analysis” would like to present the 5C Loan Analysis Principles to all concerned parties. Where credit analysis is part of risk analysis Here, 5C principles are used, namely Character, Capital, Capacity, Collateral, and Condition as follows:

1. Character: Borrower

Customers who come to borrow money from financial institutions should be honest, trustworthy, with sincere intentions. and have good financial standing They also have to be knowledgeable and experienced in real estate business management enough to enable the business to grow all the way. The analysis of borrowers from the small and medium-sized enterprises and large corporations may vary considerably. Smaller businesses may be more at risk. At the same time, large businesses can be complex. makes analysis difficult may not be analyzed in accordance with reality

2. Capital: Investment

The borrower’s sufficient investment represents the financial institution’s confidence in the borrower. It also represents a commitment and commitment to the real estate projects that are borrowed. Therefore, the analysis focuses on their own capital (Share Capital/ Owners’ Equity) who invest in the project in a high enough proportion. Will not make the financial risks (Financial Risks) of the project so high that the bank is unacceptable. This issue, therefore, focuses on the Debt to Equity Ratio analysis of the project as previously presented.

In the details of the debt-to-equity ratio Entrepreneurs often want a high debt-to-equity ratio. With the reason to have enough money to live smoothly And it is one of the credibility with high turnover. It also makes the use of their own money less. The risk is mainly transferred to financial institutions. But the disadvantage is that the money may be misused. or cause the borrower to be careless

But financial institutions tend to focus on having a low debt-to-equity ratio. because it reduces their risk It may also make enough funds available for more borrowers. But the disadvantage is that operators may not come to ask for the service. Because that financial institution may hedge too high a risk that it may not attract the interest of the operator’s request for services.

3. Capacity: the ability to pay the debt

This section of the analysis aims that the project must have a profit and return on investment that is higher than the project’s cost of capital and that it must have the sufficient cash flow to repay the bank in accordance with the conditions. Financial analysis therefore must show the results of the rate of return analysis. and analysis of the break-even point, etc., in order to see the ability to pay debts appropriately Cash Flow Analysis must be carried out rigorously.

4. Collateral: Loan Collateral

In most cases, this real estate refers to project land. and land or other assets taken by the project manager or owner as collateral. The value of the collateral is sufficient to be a direct insurance against the financial institution’s risk. for in detail The extent to which a financial institution can manage or mitigate credit risk depends on the quantity and quality of data required for credit analysis. which sometimes may not be good enough, such as a report on the appraisal of the property that is mistakenly appraised until the price is too high or underestimated

5. Conditions: various external factors

This may not be directly financially related. It is related to economic, social, cultural, war and environmental issues, etc. that affect the feasibility of investment projects. Especially in today’s environment is very important for investment. Entrepreneurs, including financial institutions, must study carefully so that the risks are not too high that they cannot develop projects.

If we know the analysis based on these 5 principles, then we will be able to facilitate the loan appropriately. No bad debt problems later will affect the stability of financial institutions.

Therefore, 5 C is used as one of the most popular methods for assessing the quality of credit applicants. These include Character, Capacity, Capital, Collateral and Conditions. Understanding what lenders consider about credit applicants can help entrepreneurs be better prepared when applying for a loan.