Creditworthiness? What does it mean?

The phrase ‘creditworthiness’ is frequently bandied around by lenders as the rationale for sanctioning or declining loans. We see the term used as a justification for lending at a higher rate and/or changing the terms of the lending.

The problem with creditworthiness is that it lacks any ability to be quantified. Business Directory define creditworthiness as;

“Creditor’s judgement of an entity’s current and future ability, and inclination to honour debt obligations as agreed upon. It is usually based on the credit history, credit rating, and character of the entity”

Everything about this definition focuses on the lender, it does nothing to provide clarity for the borrower. With that in mind let me show you the main factors that form the characteristics of creditworthiness. I will split this into four main areas and show the positive and negative factors in each. The factors can be equally applied to personal lending as well as commercial borrowing.

Bank Statements

Positive Factors

• Regular income and outgoings
• Standard items being paid, rent, mortgage, utilities etc
• Income through the account more or less matches with declared taxable income
• Salaries being paid to staff are appropriate for the roles being undertaken
• Working capital is well managed
• The account operates within agreed limits

Negative Factors

• Bounced items
• Personal transactions on the business account or vice-versa
• Payments to other lenders where no debt is declared elsewhere on an application
• Regular minimum payments of credit card debt
• Cash paid into the account in lump sums, especially from other high risk lenders
• Statements do not show the transactions expected. No rent paid, salaries missing etc
• Constantly over agreed limits

Tax Returns & Trading Accounts

Positive Factors

• Tax is being paid as it shows profitability
• Filed on time
• Match up to declared income
• Earnings are at least in part being retained
• Tax is being paid on time
• No fines for late payment

Negative Factors

• Late filing & penalties
• Balance sheet weakens
• No earnings or no tax paid

Credit Report

Positive Factors

• Payment history is up to date
• No missed payments, especially in last 2 years
• Credit report matches what you say about yourself
• No searches from high risk lenders
• Unused available credit

Negative Factors

• Excessive searches by lenders in a short period of time
• Multiple applications for credit
• Missed payments
• CCJs or defaults
• Multiple address changes in short period of time
• Name changes
• Change of company registered address

Additional Items

Positive Factors

• Strong CV
• Clear plan and clear intentions
• Awareness of industry and wider industry issues
• Qualifications

Negative Factors

• Discharged from bankruptcy
• Too much speculation within the application
• Web presence does not support your reported profile
• Cash taken from credit card
• Lack of relevant experience

Summary

None of the above is absolute or definitive. Every lender has a different take on creditworthiness but the list above covers the main items that lenders use when assessing what creditworthiness means to them. The key point is that the evidence needs to match with what you say. If you have borrowing then declare it. If you have credit issues then declare it.

Many lenders will work with borrowers that have negative issues but will walk away from the deal when they find the negative issue without being advised of it by the client.

For any questions about this post then please get in touch or add your comments below and we will respond.

By Dave Farmer

Contact Lime Consultancy

[contact-form to=’hello@limeconsultancy.net’ subject=’creditworthiness’][contact-field label=’Name’ type=’name’ required=’1’/][contact-field label=’Email’ type=’email’ required=’1’/][contact-field label=’Website’ type=’url’/][contact-field label=’Comment’ type=’textarea’ required=’1’/][/contact-form]