An expert system which analyzes five key factors affecting the credit decision (i.e., whether to extend credit/ lend or not). A lending officer can base the decision to grant credit on personal expertise and subjective judgment as well as weighting of specific key factors that help the company take an informed decision. The key factors are as follows:

1. Character: a measure of the reputation and integrity of a borrower, including its commitment to repay, repayment history, and past relationships with the lender. Most often, the age of a company is used as a proxy for its repayment reputation.
2. Capital: a borrower’s net worth or the equity contributed by a borrower’s owners. A portion of this capital may be provided as collateral against a loan. Capital and the ratio of debt to equity are usually considered good predictors of default or bankruptcy probability. The higher the ratio, the greater the probability of default or bankruptcy.
3. Capacity: the borrower’s ability to pay off the loan applied for, which reflects the volatility of the borrower’s income.  In order to evaluate capacity, lenders typically use ratios of loan payment (installment) to monthly income and total monthly payments to earnings. If repayments on loans follow a constant pattern over time, but earnings are volatile (or have a high standard deviation), there may be periods when the firm’s capacity to repay debt claims is constrained.
4. Collateral: in the event of default, a lend has claims on the collateral provided by the borrower. Collateral is comprised of assets that the lender can seize and sell if the borrower defaults. The higher the priority of a lender’s claim on collateralized assets and the higher the market value of such assets, the lower the credit risk of a potential borrower.
5. Cycle conditions: conditions of the broader economy or the state of the business cycle. A borrower’s ability to repay is influenced by changes in economic conditions which are a key factor in determining credit risk exposure for companies and industries. For example, some companies are cycle-dependent (e.g., durable goods manufactures and auto makers), while others are cycle-independent (e.g., retailers, utilities, etc.)