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Published Articles by David Balovich

Published in: Creditworhty News
Date: 3/25/98

Andrea Gleeson writes: "I wonder sometimes if I am the only one confused by what is being written and spoken about the economy. One day it appears to be good and the next day it is just the opposite. How can I be expected to make sound credit decisions when there is no consistency in what is being reported? Do you have any suggestions? Thank you".

Andrea take comfort in you are not alone, just this past week it is reported that homeownership is at an all time high. Not since 1970 have so many Americans been able to afford housing. Next I read it is estimated there will be 500,000 foreclosures this year and that 40% of all home mortgages are delinquent. Credit card companies report delinquencies declining however consumer bankruptcy filings increased 20% over last year and 85% of all consumer bankruptcies cited credit card debt as the cause for filing. 1 in every 73 households has filed for bankruptcy since 1980, a 400% increase. Business is booming but Dun & Bradstreet reports business failures increased 16% over 1996. Dollar liability from those failures was 37.4 billion up from 29.6 billion the previous year, a 27% increase. There is enough reason to be confused.

As credit managers our responsibility is to identify and minimize risk. That equates to making sound credit decisions based on basic credit principles, Character, Capacity and Capital. Commonly referred to as the 3 C's of credit these should be the foundation to every credit decision.


Considered to be the most important of the 3 C's this equates to willingness. A willingness to provide information, a willingness to answer our questions, a willingness to return telephone calls and most importantly a willingness to pay. I was recently told by a client that a customer informed them that although they could pay on time they were not willing to because they wanted to pay when they were ready to do so not under the agreed to terms. This is a reflection of character and in this case this customer lacks it.


Capacity is the ability to pay. It is not enough to be willing to pay, although that is a good sign; one has to have the ability to pay. That means that current assets exceed current liabilities, which provides net working capital. If current assets are insufficient to pay existing current obligations then how is our new debt to be repaid? It is not necessary to have a financial statement to determine this. What amount of balances is maintained in bank accounts? How much debt is listed on a credit report and what is the payment history?

The answers to these questions give us an indication of the applicant's ability to honor the terms of the agreement he has entered into with us.


Capital is the ability to raise debt. In the event capacity is lacking does the applicant have the ability to raise additional debt through borrowing against or liquidating assets. To determine the answer to this question we have to ask questions concerning assets, current and fixed, and the ability of the applicant to raise additional debt if needed whether it be secured or unsecured. In addition to our asking these questions the applicant has to be willing to answer, character.

The analysis of the applicant utilizing the 3 C's will determine the criteria that we should use in making our credit decisions. Credit decisions have nothing to do with competition, industry standards and the current market environment. Those factors are utilized in making business decisions that often take precedence over credit decisions. We should understand the difference between a credit decision and a business decision. Which are we making? The type of decision our organization ultimately makes determines whether the news reported is good or bad and once recognized less confusing.

Eldridge Cleaver said it best when he wrote: You are either part of the solution or you are part of the problem .

I wish you well.

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