Executive Summary

^{Author: Guilherme Fávero — Advisor: Raissa Silveira de Farias}

^{Summary prepared by the ResumeAI tool, an artificial intelligence solution developed by the Pecege Institute focused on synthesis and writing.}

This study analyzes the 5 Cs of credit methodology (character, capacity, capital, collateral, and conditions) in the credit analysis and granting process of an automotive retail company in the interior of São Paulo. The research identifies the organization’s adherence to the model, points out gaps, and proposes improvements to enhance risk management. The premise is that the informal or incomplete application of frameworks such as the 5 Cs exposes the organization to default risks that a systematic approach could mitigate.

The credit market is central to the economy, connecting agents with excess resources to agents who need capital (Selan, 2014). Its relevance is measured by the Credit-to-GDP ratio, which in Brazil reached 54.4% in 2024, a modest indicator compared to the United States (192%) and Chile (109.5%), according to ANBC (2025). This disparity suggests growth potential, but also exposes structural inefficiencies in the Brazilian system.

The credit market in Brazil is characterized as expensive and inefficient, with low credit balances, high default rates, and unsatisfactory asset recovery (Wyman, 2018). The risk of default is the main concern for lenders. A delinquency exceeding 90 days is classified as “default” by the Basel Committee, negatively impacting the lender’s cash flow (Carvalho & Dos Santos, 2013). To mitigate this risk, organizations use credit analysis processes to assess the probability of a borrower honoring their commitments.

The 5 Cs of credit methodology is an analytical tool for structuring risk assessment. Defined by Sebben (2020) as the “guidelines” for analysis, the tool proposes an assessment of the borrower in five dimensions: Character, Capacity, Capital, Collateral, and Conditions. The application of the model is the subject of academic studies. Souza (2013), when analyzing an agricultural company, concluded that the organization applied the methodology partially, recommending its complete implementation. Lima (2017), on the other hand, observed in a credit cooperative that the process followed the principles of the 5 Cs, demonstrating its applicability.

Credit management is a strategic pillar for the sustainability of companies, especially for small and medium-sized ones, where cash flow is a critical factor. The absence of standardized processes and established methodologies can compromise business stability. This work is justified by the need to examine how an automotive retail company manages its credit risk and how the 5 Cs structure can strengthen its operations, proposing improvements applicable to its reality.

The research was designed as an applied qualitative case study. The focus was on the credit granting process of a tire resale and automotive services company in the interior of São Paulo. The choice of a single case study allowed for an in-depth examination of the internal processes, routines, and perceptions of those involved. The qualitative approach was essential for understanding the complexities of the decision-making process that quantitative methods would not capture.

Data collection used methodological triangulation, combining three techniques to ensure the robustness of the findings. The first stage was a semi-structured interview with an employee from the financial department, responsible for credit analysis. Conducted at the company, the interview followed ethical principles, with informed consent and a guarantee of confidentiality. The script explored the analysis process flow, the criteria, the challenges, and the tools used in decision-making.

The second stage was direct and non-participant observation of work routines. The flow of a credit request was followed, from the client’s initial contact to the final analysis by the finance department. This technique allowed for the observation of interactions between departments, internal communication, and the practical application of norms, complementing the interview information.

The third stage was the documentary analysis, examining the client registration form and the internal credit analysis manuals. The analysis of these documents allowed for a comparison between the prescribed process and the observed and reported practices. The data collected from the three sources were comparatively analyzed, using the theoretical framework of the 5 Cs of credit by J. Fred Weston and Eugene F. Brigham as the main analytical structure for interpreting the results.

The company studied has over five decades in the market, founded in the late 1960s. It operates more than twenty branches in the interior of São Paulo, offering automotive services and acting as an official distributor for a major tire manufacturer, covering almost three hundred cities. Its expansion plan aims to reach forty-four stores, making credit management even more critical. The company offers cash and installment payments, with all installment sales submitted for analysis by the credit and collections department. This department defines limits for each customer based on internal policies that differentiate individuals, legal entities, and product lines (light, heavy, and agricultural).

The analysis of the results reveals that the company adopts practices aligned with each of the Cs. In Character, which assesses the borrower’s reputation and history, the company consults commercial references and agencies such as Serasa and SPC. According to Capital One (2024), character is shaped by how the borrower has managed debts in the past. Although the use of credit bureaus is robust, the consultation of commercial references is limited, as clients only indicate good relationships, and LGPD hinders information exchange. It is suggested to strengthen internal communication between sales and collections to formally integrate the information collected in the field by salespeople into the credit analysis.

In Capacity, which measures the ability to generate cash flow to honor commitments, the company requests a billing statement for the last twelve months from legal entity clients. Lopes (2020) highlights that this analysis confronts billing with indebtedness. However, the presentation of the document is optional, required only for larger volume operations. This flexibility is a risk. A tiered credit policy is proposed, where the documentation requirement becomes more rigorous as the credit amount increases. For credits above a certain level, the presentation of the income statement and the balance sheet could be mandatory, providing a complete view of payment capacity.

Capital refers to the assets that the borrower owns to settle debts. Serasa Experian (2024) states that capital represents the borrower’s financial security. The company analyzes capital in two ways: for in-store services, it verifies vehicle ownership via RENAVAM; for distribution, external sales representatives evaluate the client’s physical structure. The process is effective but lacks standardization. It is recommended to implement a standard visit checklist for sales representatives, with a scoring system and a requirement for photographic records. This would create a structured database and transform the sales team into an extension of the credit department.

Collateral refers to the real guarantees that secure the operation. According to Lopes (2020), these are assets that can be executed in case of default. The company does not require specific collateral in its granting process but uses information from the Capital analysis as a basis for future legal actions. The approach is reactive. It is suggested to formalize the requirement for guarantees for higher-risk or higher-value operations, aligned with the tiered credit policy. The definition of which assets would be accepted as collateral should be made with the legal department, considering the liquidity and ease of execution of each asset, thereby speeding up credit recovery.

The Conditions refer to the terms of the operation (term, installments) and the macroeconomic environment. SPC Brasil (2024) emphasizes that an unstable environment requires stricter risk control. The company already establishes conditions based on internal rules, and may request down payments or reduce payment terms for new clients. It is proposed to create a standardized payment conditions matrix, linked to the client’s risk profile. New clients could have credit only with a down payment, while clients with an excellent history would be rewarded with favorable conditions, encouraging timely payments. The implementation of a grace period for new purchases after the settlement of protested debts would also be an effective measure.

Rosa’s (2018) study on retail concluded that companies focus on the Cs of character and capacity, neglecting the others and increasing risk. The analyzed company demonstrates broader concern, although with opportunities for deepening in capital and collateral. Unlike 67% of companies in Rosa’s research, which do not conduct new inquiries in secondary purchases, the studied company adopts periodic inquiries, a strong point in its risk management. In contrast to the banking sector, where studies such as those by Al-Slehat et al. (2024) and Peprah et al. (2017) show a great emphasis on Capacity, retail deals with more lower-value operations, requiring an agile and secure process. Al-Slehat et al.’s (2024) research also highlights the importance of analysts’ intellectual capital, something that standardization and training can strengthen in the studied company.

The studied company employs robust practices and invests to mitigate risk in its credit operations. Its processes, although not formally structured under the label of the 5 Cs, demonstrate consistent alignment with the methodology’s principles, providing security to analyses. However, the study reveals opportunities for improvement to enhance efficiency and control. The implementation of staggered credit policies, standardization of analyses, formal request for collateral for larger operations, and strengthening of synergy between the commercial and financial sectors are the main recommendations.

The 5 Cs tool is a strategic ally for companies with credit sales, allowing a multifaceted analysis of borrowers. However, even the most meticulous analysis process does not eliminate the risk of default. External and unforeseen factors, such as sectoral crises or mismanagement by the borrower, can lead to non-compliance with obligations, even by customers with a good history. It is concluded that the objective was achieved: it was demonstrated that the studied company uses practices aligned with the 5 Cs of credit methodology, identifying, however, opportunities for improvement to strengthen risk management and sustain healthy and secure organizational growth.

References:
^{Al-Slehat, Zaher Abdel Fattah et al. Creditworthiness Criteria According to the 5Cs Model and Credit Decision: The Moderating Role of Intellectual Capital. International Review of Management and Marketing, [s. l.], 2024, v. 14, ed. 6, 30 jul. 2024.
Anbc. 20 years of credit-GDP relationship in Brazil. Available at: <https://anbc. org. br/20-anos-de-relacao-credito-pib-no-brasil/>. Accessed on: 4 Mar. 2025.
Aranha, José Moura; Dias, Alexandre Menezes; Aranha, Caroline Pereira Moura. Credit Scoring: proposal of a model for microenterprises (Small Business Scoring). 2nd International Seminar on Integration and Regional Development, [S. l.], p. 04, 9 Oct. 2014.
Carvalho, Demerval Bicalho; Dos Santos, Gustavo Martins. The Basel Agreements – A roadmap for implementation in financial institutions. Operational Risk, [S. l.], 7 Mar. 2013.
De, C. What are the 5 C’s of credit analysis? | ACSP – Commercial Association of São Paulo. Available at: <https://acsp. com. br/publicacao/s/quais-sao-os-5-c-s-da-analise-de-credito>. Accessed on: 24 Mar. 2025.
Federal Government (Brazil). Gov. br. Functioning of the National Financial System. Investor Portal, [s. l.], 25 Oct. 2022.
Lima, Jairo Fragoso de. Conceptual exposition of the credit granting policy of a credit cooperative. 2017. TCC (Graduation – Bachelor’s Degree in Administration) – Federal Institute of Education, Science and Technology of Paraíba – IFPB, [S. l.], 2017.
Peprah, Williams Kwasi et al. Ranking The 5C’s Of Credit Analysis: Evidence From Ghana Banking Industry. International Journal of Innovative Research and Advanced Studies (IJIRAS), [s. l.], v. 4, ed. 9, 9 Sep. 2017.
Rosa, Cristiane da. Credit Management – An analysis with construction material retail companies. 2018, 51 pages. Monograph (Specialization in Accounting and Financial Management). Federal Technological University of Paraná, Pato Branco, 2018.
Sebben, R. José. Credit and Collection Analysis. First Edition ed. [s. l: s. n.].
Selan, Beatriz. Financial market: Capital market. 1st ed. Rio de Janeiro: SESES, 2014. 200 p.
Serasa Experian; Evaluation with 5 C’s of credit: learn how to apply it in analysis and granting. [S. l.], 29 Feb. 2024.
Silva, José Pereira da. Credit risk management and analysis. 3rd ed. São Paulo: Atlas, 2000.
Souza, Janaina Oliveira De. Credit and Collection Policy Based on the 5 C’s Technique: Case Study in an Agricultural Company Located in the South of Santa Catarina. 2013. Tcc (Graduation – Bachelor’s Degree in Accounting Sciences) – University of the Extreme South of Santa Catarina – Unesc, [S. L.], 2013.
What are the 5 C’s of credit?. Capital One, [s. l.], 8 Feb. 2024.
Wyman, Oliver. Analysis of the Credit Market in Brazil. 2018. Available at: <https://www. bcb. gov. br/conteudo/eventos/Documents/Seminarios-Riscos-Estabilidade-Financeira-Economia -Bancaria/2018XIIIESTFINECOBAN/Policy%20day/Session%20IV%20-%20Credit%20Market/SecaoIVApresentacaoOlyver_Wyman. pdf>. Accessed on: 04 Mar. 2025.}

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Executive summary from the Final Coursework of the Specialization in Finance and Controllerhsip of the MBA USP/Esalq

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