In the five Cs of credit, what does 'capacity' refer to?

• A. The size of the loan requested.
• B. The borrower's ability to service debt.
• C. The quality of collateral.
• D. The stability of cash flows.

Answer: (B)

Capacity measures the borrower's ability to service debt, meaning the cash flow available to make regular loan payments. Lenders evaluate income or business cash flow, job or business stability, and existing obligations to determine if there will be enough cash to cover debt service, often using metrics like the debt-service coverage ratio. This is why the best description is the borrower's ability to service debt. The size of the loan relates to how large the loan is, collateral quality refers to security backing the loan, and while cash-flow stability is a factor in assessing capacity, the core idea of capacity is the actual ability to repay.