Is Creditworthiness a Real Thing?

As an entrepreneur, the world of finance can be a whirlwind of jargon and acronyms. With terms like accounts payable, cash flow, and EBITDA, you might find yourself questioning if “creditworthiness” is just another buzzword.  

Here’s the truth: creditworthiness is very real and crucial for your business. It’s a measure of how lenders assess the risk of lending to you. 

What is creditworthiness? 

Creditworthiness isn’t a single number or statistic like a credit score. Instead, it’s broad evaluation lenders use to gauge the risk of lending to you. They look at various financial factors to see if you’re likely to repay your debts. Essentially, it’s about how lenders determine if you’re a reliable borrower. 

Lenders are in the business of minimizing risk. They want to be as sure as possible that they’ll get their money back, plus interest. While there’s always some level of risk, lenders try to do thorough research to reduce the chance of default. 

Your past credit and future creditworthiness  

That’s where credit and credit history come in. Lenders will look into your finances to see if there are any red flags — things like late payments, the amount of money you have charged versus how much credit you have available, defaults, insolvency, or poor cash flow could signal that you’re a riskier borrower than they might like. 

The relative importance of your business’ creditworthiness varies depending on the kind of loan in question. For example, a longer-term loan may require a much higher creditworthiness threshold than an equipment loan. 

The reason for this is term loans come with bigger financial obligations and longer repayment schedules, whereas equipment loans are self-collateralizing and banks can easily sell the machinery purchased with the loan to recoup their money. The importance of your creditworthiness might shift depending on what kind of loan you pursue. 

What determines creditworthiness? 

Your creditworthiness may not boil down to a certain score alone. However, lenders look at several financial figures to help determine their decision. The 5 C’s of credit are perhaps the biggest determinants of your creditworthiness. They account for five key components of your business’ borrowing history: 

Character 

This reflects your trustworthiness as a borrower. Lenders review your history of repaying debts and your overall business experience. Achievements, like a successful previous venture or relevant education, can boost your credibility. 

Capacity  

Lenders assess your cash flow to see if you can manage repayments. They also consider how long your business has been operating. Newer businesses might face challenges here but can overcome them with a solid business plan. 

Capital 

This shows how much of your own money you’ve invested in your business. Lenders don’t want to be the only ones taking on risk when they put their cash on the line to help you fund your business. 

Collateral 

Collateral is the security you provide to back a loan. Most loans require collateral, but equipment loans are an exception as the equipment itself serves as collateral. 

Conditions 

The purpose of your loan affects creditworthiness. Loans used for tangible purposes, like buying inventory, are generally seen as less risky than loans for marketing or other less direct expenses. 

Personal Credit and Business Credit 

For newer businesses without extensive financial history, lenders may look at your personal credit. Your personal credit report shows how well you manage debt and affects your business loan application. A strong personal credit history can positively impact your business’s creditworthiness. 

If your business already has a credit history, that’s a plus. A good business credit score can enhance your application. Business credit scores evaluate your company’s credit use and industry-specific risks. 

Creditworthiness: The big picture  

Creditworthiness is a key factor in securing business loans and financing. It’s a comprehensive measure of your financial history and current situation. While credit scores may vary between agencies, creditworthiness offers a consistent way to evaluate a borrower’s reliability. 

How cash flow impacts your creditworthiness 

Managing cash flow is key to keeping your business’s credit in good shape. When your cash flow is healthy, you can pay off debts on time, invest in growth, and plan for the future. But if cash flow gets out of whack, you risk missing payments and hurting your credit. 

With Forwardly, you don’t have to worry about cash flow management. We make it easy to handle accounts payable and accounts receivable with faster payment options. Our detailed cash flow forecasts and financial reports help you stay on top of your finances and boost your creditworthiness. 

Ready to take control of your cash flow and improve your credit? Sign up for Forwardly today—no monthly subscription required!