CS of Credit: (1) Capacity Term Paper

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But even if not much is personally at risk, if the individual has the capacity to repay the loan, the lender may take a chance. Having collateral is even more important than capital, as it enables the lender to get back at least some or the entire loan her or she has made. However, going through the legal process of getting the money through forcing the entrepreneur to cash in on that collateral is more difficult than simply extracting payment -- thus an entrepreneur having a large capacity to repay is even more ideal. Market conditions are somewhat important, as having a high interest rate can make lending more attractive, and a strong economy can enable the business to prosper and thus increase the chance that the lender will be repaid.

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An entrepreneur with good character is important, so that the individual will make a good faith effort to prosper as a businessperson and repay the debt. However, favorable conditions and character will mean little if the individual has a troubled payment history, and little reserves to repay the loan. Most enterprises fail, regardless of favorable market conditions and the good character of the entrepreneur.

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