What creditworthiness means

What creditworthiness means

Whenever a person or business entity applies for some form of credit, there are variables considered, such as affordability and creditworthiness. 

The latter has to be understood in order to find ways to improve chances of qualifying. From a lending institution’s perspective, it must be understood as a risk management tool. Extending credit to the wrong customer leads to exposure to unnecessary risk.  

As a business owner having a clear understanding of creditworthiness is important because it gives a better perspective of what it will take to qualify. Credit can be ideal for helping a business grow, so you need to know what lenders are looking for in the ideal customer. This gives them an edge.  

Creditworthiness is the valuation of the possibility that a borrower may default on debt obligations.  

What are some of the factors that determine creditworthiness? 

Liquidity – By examining how long it will take for assets to be converted into cash, this gives better insight into creditworthiness. 

Cash Flow – If an organisation has more money flowing in than going out, this could put it in a better position to qualify. 

How promptly it pays– The rate at which an individual or business pays debts back is a good indicator of how well it will pay future debt obligations. 

The number of customers a company has – This gives better insight into how well it is doing. A low number of customers is considered to be a bigger risk. 

Repayment history – If an individual or business has a history of late or skipped payments, then this is a good predictor of future behaviour. 

Shared credit accounts – This means that when one individual applies, the credit standing of their partner is taken into account. 

Credit rating – For countries and large companies, credit rating agencies are responsible for keeping records. Private credit ratings are by credit bureaus. 

Assessment of financial records – This can provide much needed quantitative information to make the decision.

Categories: Financial tips