Creditworthiness: Meaning, importance and how to improve?

 

Creditworthiness is one of the commonly used terms by banks and NBFCs while obtaining a business loan. What does it mean and why is it important to be creditworthy?

This article defines creditworthiness and it further elaborates on factors determining creditworthiness, 5C’s of creditworthiness and more. Let’s take a closer look at it.

What is creditworthiness?

The meaning of creditworthiness is how likely and capable a borrower is to repay the loan amount. In other words, if we need to define creditworthiness – how worthy a borrower is to grant a credit or loan. Here, it is important to understand that the creditworthiness of an individual is separate from the creditworthiness of a business.

What does it mean to be creditworthy?

If your business is considered creditworthy, it means:

• Your business has a good credit score. Usually, businesses required a minimum credit score of 700 for approving a business loan.
• Your business has a good credit history and has made timely repayment of previous loans, taxes and bills.
• Your business is profitable and has the capability to repay the loan.

Factors determining creditworthiness

Creditworthiness is assessed through various factors including credit score, credit history and financial documents.

• Credit score: Agencies such as CIBIL analyse and score a business on the basis of past loan repayment history and other financial transactions. The credit score is a numeric presentation of creditworthiness.
• Credit history: Credit and repayment history is one of the important factors in determining creditworthiness. A lender analyses previous loans and if you have made timely repayments. Any default will have an adverse impact on your creditworthiness.
• Profitability: Consistent profitability reflects your ability to repay the loan. Hence, it is important to have audited documents such as P&L statements, balance sheets, etc.
• Collateral: Having collateral increases your creditworthiness as it reduces the risk of the lender. In case you default, the lender can liquidate collateral to recover the loan.

How can you check your credit score?

It is simple to check your CIBIL score or credit score. You can Tata nexarc’s Business Loan page. Click on ‘Check CIBIL score’. Enter the required details and check your score. Alternatively, you can also check exclusive loan offers.

5 C’s of creditworthiness

• Character: Character is one of the important C’s of credit. It refers to the reputation and history of the borrowing entity. History about paying debts on time and credit score. A strong character indicates the likelihood of timely repayment.
• Capacity: The borrowing business’ income, debt-to-income ratio, etc., suggest if it will be able to make regular repayments of loans. Your capacity of repaying determines your loan amount.
• Capital: It refers to the money or assets that the company is investing in the project. Higher the amount that the company is investing, the better the interest rate on a business loan and loan terms as it reduces the risk of the lender.
• Collateral: As mentioned before, collateral is also a critical factor and directly impacts loan amount and interest rate. It is one of the key factors that influence the calculation of interest rates as it decreases the risk of the lender to a great extent.
• Conditions: Conditions refer to other factors such as market trends, economic conditions, your business plan, and so on. Therefore, it is important to prepare a robust project report for a business loan. You can include all the details of the project including marketing strategy, sales projections, the objective of the loan, roadmap to repay the loan, etc., so that the lender gets a clear idea about your use of funds and repayment plan.

Why is it important to be creditworthy?

Creditworthiness does not only impact your ability to obtain a business loan but, it also influences your business in several other ways. Here is how:

• Obtaining a loan: Strong creditworthiness helps you to obtain a business loan in a hassle-free manner
• Business opportunities: Creditworthiness is also crucial for your suppliers. Your reputation of making timely payments attract suppliers and encourages them to deliver your raw materials on time. This further helps you in creating more business opportunities for your business and leads to growth.
• Attracting better talent: Employees also prefer to work with companies that have higher creditworthiness. It gives them confidence that they will receive their payments timely.
• Business reputation: Higher creditworthiness helps you to have a better reputation in the market. A better reputation automatically attracts more business and meaningful partnerships that can lead to growth.

How to improve creditworthiness?

So, do you want to improve your creditworthiness? Here is how you can do it.

• Firstly, check your credit score or CIBIL score. This will help you to determine where you stand currently and whether there is a need to improve your CIBIL score.
• Ensure all your financial documents that depict the financial status of the company, and your creditworthiness are updated and audited.
• Pay your existing EMIs and credit card bills on time. Avoid paying only the minimum bill amount for credit card bills.
• Pay all other utility bills on time. Also, make timely payments of your taxes.
• Check your cashflow regularly. Importantly, avoid having negative cashflow.
• Avoid having multiple credit accounts.

Remember that one can not improve creditworthiness overnight. It takes time to bring positive changes and build a reputation as creditworthy. However, it is important to be consistent.

Concluding remarks

To sum up, creditworthiness is not only linked to obtaining business loans. However, it is important from the point of view of overall business growth. Therefore, it is best to maintain strong creditworthiness and improve it in case it is not up to the mark. One must understand that building a strong creditworthiness is not a one time process but a continuous process.