What Is Creditworthiness?

Creditworthiness is a relatively simple concept used, unsurprisingly, to assess how creditworthy a company is. 

This is both useful for lenders and the companies themselves, as lenders can see the likelihood that a company can pay back a loan in full, in time and within the set terms and companies can see how their credit is viewed by lenders. For the most part, companies and credit analysts use a set of determining factors to determine an overall credit score, commonly known as the 5 C’s of credit.

Capacity – Does your business or the business you plan to lend to have the pure financial capacity to pay its invoices? This can be estimated by measuring cash-flow, and credit analysts usually use this metric to determine business capacity alongside debt to income and comparisons to historic revenue.

Character – Character is a qualitative measurement that can be reasonably reliably assessed by those experienced in credit analysis. A good judge of character can determine whether a person is likely to make good on their loan, but this can also be measured quantitatively. Using resources such as business references, legal history and previous charges and CCJs, analysts can use these alongside more qualitative judgements of character to reasonably determine whether the company will pay back their loan.

Collateral – If a business has a questionable credit history or a reduced capacity, collateral can be used to secure its debt obligation. This is usually done by agreeing on something of equal value or more than the loan to incentivize clients to pay their debts. However, if clients do end up defaulting on debts regardless of collateral, many companies will be wary of seizing assets before working out a new payment plan.

Capital – Measuring capital allows us to describe the total financial and non-financial assets of a business. This includes the amount of capital the owners themselves have invested in the company, possibly also helping to form a character assessment to see whether the owners have confidence in their own company. However, this particular metric may vary a lot between industries, as some are naturally more capital-intensive than others.

Conditions – Conditions consider aspects outside the reach or influence of a single company and instead focus on the status of the industry or area as a whole as well as competitors and geographical location. All of these factors could affect your client’s business and, in turn, their likelihood of repaying your loan in time.

Here at DataGardener, we will very soon be launching our new service allowing anyone access to a single company’s credit reports from as little as £5 plus VAT. This new venture will allow creditors and lenders across the UK to view credit reports for any UK based company, making the process of assessing whether a company is creditworthy easier than ever before.

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