Criteria for Business Creditworthiness
Creditworthiness is probably the single most decisive factor whether companies will lend, increase line of credit, or sell to a business. Creditworthiness is not only based on your company's business reputation but also the company's overall financial strength. Banks, suppliers, and others who provide credit for your business, will examine the business credit report to determine the company's creditworthiness.
Your company's creditworthiness depends on 4 basic criteria,
- Financial strength
- Character Traits of the business
- Economic environment
Financial Strength
The financial strength of the business is one of the most important variables to infer creditworthiness as it measures whether the company has the financial resources to repay its creditors. Fundamentally, it is the financial resources available to the business, which could be in the form of cash, funds from debt or investment. Business capital can be in the form of short or long-term. Short term Working Capital is the measurement of the availability of liquid assets of a company has to fund its day-to-day obligations, such as,
- Repayment of interest on loan
- Bill payments to suppliers
- Employee salaries
- Tax liabilities
These are elements in the business cycle that can quickly absorb cash. If working capital dips too low, a business risks running out of cash. The availability of a bank credit line is often used to smooth out peaks and valleys of a business cycle.
Long-term capital is usually a loan obligation with maturity date that is more than 1 year. When utilize properly, a company can optimize the use of the borrowed money to finance long-term investments and use the earned profit to pay for the interest of the borrowed money.
Lenders also calculate specific financial ratios to determine where the business stands within the industry and in comparison to other businesses that are similar in size. This portion of the credit business report closely examines the financial statements for items such as; working capital, debt to equity, cash flow and net worth.
Character Traits of the Business
Lending institutions compose an evaluation on whether the business has the management ethics to stand behind its business transactions. Character in business consists not only of ethical attitudes (such traits as high moral values, diligence, determination, confidence, perseverance, responsibility, resourcefulness, trustworthiness, efficiency, and respect), but also the company's credit history and other operational traits.
Business character is frequently determined by analyzing the credit history or credit score of the business. To acquire a business FICO score a business will require at least 4 trade references. Factors affecting a business credit score include:
- Timeliness of payments
- Unpaid accounts
- Outstanding debt
- Available credit
Although credit history is major factor, there are other factors used to judge business character and they include:
- Owner's know-how and experience
- Structure of business
- Size of business
- Years in operation
Economic Environment
The economic environment surrounding the business will have external events that can affect the operations of a business. These circumstances are all examined by the lending institution to determine creditworthiness. These external factors will include the overall economy, growth within the industry, government regulatory changes and more.
The business credit score is used by creditors to establish the risk versus reward of granting a business credit, and is also used to establish the interest rate on loans and business lines of credit. As the business credit report affects the operations of the business, it is within your best interests to build an excellent credit rating.
As it is with the individual credit scores, it is important to review your business credit profiles from credit bureaus at least once or twice a year. Make sure the information is accurate. Upon finding errors, contact the appropriate bureau and report the errors immediately with proper documentation.